|Friday, 02 September 2016 00:00|
Hike in government spending masks this
The rally in the stock markets may not suggest it but the recovery in the economy is not just slow, it is slowing. Real GDP grew at just 7.1% y-o-y in Q1FY17, sharply lower than the 7.9% y-o-y in Q4FY16. Had government spends not risen a sharp 18.8% y-o-y, growth would have been a very muted 5.7% according to Nomura, as compared to 8.4% in the previous quarter. What’s worrying is that the weakness appears to be broad-based. Fixed capital formation shrank for the second consecutive quarter, clocking a negative 3.9%. Clearly, the 25% levels of surplus capacity, coupled with the lack of demand visibility both locally and overseas, is stymieing investments. Several banks have reported a contraction in their corporate loan books in the June quarter, indicating that demand for project finance is absent and even that for working capital is subdued. Order inflows at capital goods manufacturers have been dull, another indication that fresh investment is not forthcoming. Moreover, private consumption also moderated in Q1FY17, clocking in a growth of 6.7%, compared with 8.3% in Q4FY16. A good monsoon and the Pay Commission dues, though, will drive this up later in the year. The expansion in retail loan portfolios that banks have been reporting indicate the appetite for purchases of assets such as homes and cars is picking up.
However, while the data shows manufacturing GVA appears to be holding up—9.1% y-o-y in Q1FY17—corporate results are not encouraging. Net sales for a sample of nearly 2,500 companies (excluding banks, other lenders and oil marketing companies) shows these expanded just 3.2% y-o-y in the three months to June. That’s anaemic by any yardstick, even in a disinflationary environment such as the current one and suggests companies are neither able to push through volumes, nor command pricing power. Worse, profits have grown in single digits—at 8.2% y-o-y—even though raw material costs were down sharply by nearly 250 basis points and expenses on employees stayed flat. The absence of any increase in wages, during the quarter, is reflected in the moderation in the gross value added or GVA to 7.3% y-o-y in Q1FY17, from 7.4% in Q4 2016. For the economy to grow faster, the agriculture sector must do better—it grew just 1.8% y-o-y in Q1FY17—so that farm incomes get a boost. Also, sectors such as construction, which grew at a painfully slow 1.5% in Q1FY17, are critical given they create employment—hence the construction package on Wednesday. While lower interest rates may help, that alone can’t drive the recovery.