Pay panel boosts GDP, deficit control cuts into it
To be sure, the September quarter GDP numbers are comforting especially since the headline 7.4% year-on-year is stronger than the 7% yoy reported in the April-June quarter. Even so, they’re not enough to dispel doubts about the speed of the economic recovery; that, it would appear, will remain frustratingly fragile for at least a year or so. Nevertheless, it’s encouraging agriculture has grown at 2.2% yoy—despite two consecutive droughts and an estimated 1.8% decline in the first advance estimate of crop production. What seems to have rescued the sector is heightened activity in allied and non-crop areas; whether this is sustainable is unclear. Better industrial growth, which has seen a pick up at 6.8% yoy from 6.5% yoy in the June quarter—driven by manufacturing at 9.3%—is less of a surprise because there has undoubtedly been an uptick in some segments such as commercial vehicles. That said, aggregate data from the corporate sector doesn’t reflect any big jump in production—volume growth has stayed more or less muted across sectors and manufacturers of capital goods have actually cut their forecasts for order inflows. Which is why the jump in gross fixed capital formation at 6.8% yoy in Q2FY16, and way above levels seen in the last five to six quarters—even if it comes off a base of 3.8%—is so hard to understand.
Given there’s surplus capacity to the extent of 25-30%, it doesn’t seem like too much will be added soon. Most large corporations—whether in the public or private sector—are strapped for cash and are pruning capital expenditure. The problem for the manufacturing sector is that the cost benefits from lower oil prices will soon fade away, and unless revenues rise sharply, profits will stagnate, leaving them with less to invest. Coming at a time when fixed investment has slipped to 29.6% of GDP in April-September 2015 from 30.6% last year, that is not good news. For the economy, the drop in momentum in services,which grew at just 8% in the September quarter, needs to reverse meaningfully. Else, far fewer jobs than needed to spur consumption will be created. While the slower tempo in private consumption, which rose 6.8% yoy—the weakest in four quarters—is attributed to weaker purchasing power in rural India, the slow pace of job creation might just put a lid on urban consumption too.
Also, there’s too much hope being pinned on higher salaries of government employees boosting consumption. Demand could well get a fillip, but the flip side is the government will need to curb spends—perhaps on key areas—if it is to keep the deficit in check. That would stymie activity in construction—already dull, having grown at an anaemic 2.6% in Q2FY16. What also looks likely to keep the recovery muted is weak exports—down 17% yoy in H1FY16—which could end up way below the $310.3 billion in FY15. All in all, a secular recovery seems some time away.