Good cheer, won't last PDF Print E-mail
Friday, 14 December 2018 07:17
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Shobhana edit

The cheer surrounding the low inflation in November and high factory output in October needs to be tempered because the moment isn’t going to last. The IIP growth of 8.1% y-o-y has much to do with bigger inventories since, this time around, Diwali was celebrated in November. It is not surprising, therefore, that the consumer goods category—especially durables—has done well. It was, after all, the festive season. However, going by wholesale despatches, sales of passenger cars had slowed significantly in November as had those for commercial vehicles.

Again, the sharp spike of 16.8% y-o-y in capital goods seen in October comes off a modest base. Nonetheless, it is true the government has been spending on infrastructure. The spend of Rs 1.77 lakh crore between April and October—mostly on defence services, railways and roads—compares favourably with the Rs 1.62 lakh crore in the comparable period of 2017. But data from CMIE shows that, between April and September, the value of new projects announced was flat as was the value of completed projects. So, while there is no doubt some pick up in investments, it is modest. Several business groups are acquiring stressed assets via the IBC route. This means less fresh capacity will be added though capacity utilisation will increase as production at these units is ramped up. With private sector investments crawling, private consumption spends slowing and government expenditure likely to be crimped owing to fiscal concerns, it is hard to see growth gaining momentum in the next six months.

Private final consumption expenditure grew at just 7% y-o-y in Q2FY19, compared with 8.6% y-o-y in Q1FY19. Moreover, profit growth in the corporate sector has been fairly muted in H1FY19, suggesting there are no big surpluses to be spent. Net profits for a sample of 1,851 companies (excluding banks and financials) rose by just 5% y-o-y if support from other income was excluded. Also, while bond yields may be trending down, the reality on the ground is somewhat different. Money is actually becoming costlier because banks have been raising interest rates on deposits and have, therefore, needed to raise lending rates too. At 3-4%, real interest rates today are high. If that’s a spoiler for investments, NBFCs aren’t as flush with funds as they used to be, which could keep consumption on a leash.

To be sure, the government could well unleash a stimulus—through loan waivers and road and construction projects—ahead of the elections, funded by some chunky cash surpluses from RBI. It can’t hurt too much at this point because inflation is running at low levels and could well undershoot RBI’s benchmark of 4% given benign food prices, easing input costs and the recovery in the rupee.



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