A big uptick next year looks increasingly unlikely PDF Print E-mail
Tuesday, 03 March 2020 08:11
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Shobhana edit

The slight sequential uptick in the economy in the December 2019 quarter is little consolation with the impact of coronavirus now threatening to hit growth badly, at least for a few months. Even before the severity of the damage that could be caused by the spread of coronavirus became clear, it was evident growth wasn’t really recovering meaningfully. High frequency data for January didn’t quite match the rather robust PMI data; production of steel contracted, as did consumption of diesel and the demand for electricity—indeed, factory output de-grew. Loan growth averaged a lowly 7% year-on-year (y-o-y), half the levels of 14% seen in early 2019. More pertinently, loans to industry increased by just 1.6% y-o-y. Early trends for February seem to be little changed—non-food credit growth in the first fortnight actually plunged to a near-three year low of 6.3% y-o-y. The very small appetite for loans could mean businesses are scaling back, and that consumers too are postponing purchases, which cannot help job creation. On the contrary, we could see more job losses. Sales of cars, bikes, and the all-important commercial vehicles continue to be anaemic; Ashok Leyland reported a very large fall in domestic wholesale despatches—nearly 40% y-o-y—while Bajaj Auto reported a fall of 24% y-o-y.

What’s worrying is that the performance for FY20 comes on the back of a poor show in FY19, when the economy grew at just 6.1% and not 6.8% as earlier believed. The Q3FY20 growth of 4.7% y-o-y is a 27-quarter low, pulled down, inter alia, by a contraction in manufacturing and contraction in fixed investment of a very steep 5.2% y-o-y. Much of this was seen in the earnings season. For a sample of 2,592 companies (excluding banks, financials, and Tata Motors), net sales fell 3% y-o-y while operating profits were down by 3.43% y-o-y. The profits before tax plunged 13% y-o-y, and despite the lower rate of corporatation tax, profits after tax contracted 11% y-o-y. Many are drawing comfort from the rise in private consumption, which came in at 5.9 % y-o-y in the December quarter after a lacklustre performance in the first half of the fiscal. It must be remembered, however, that this was the festive season. The recent trends—sales of cars, bikes, and applicances—don’t point to any big uptick in consumer spends. It is not clear whether the slightly better private consumption in the December 2019 quarter is the result of better incomes and optimism on the jobs front, or easier access to financing; it is possible banks are pushing retail loans at attractive rates, but there may not be too many takers. This is worrying because the government is running out of money and, after some big spending in H1FY20, will need to rein in expenditure in the second half of the year.

In Q3FY20, not surprisingly, it was government spending that helped, together with a positive contribution from net exports, because imports were very subdued. The two together contributed close to 60% of the growth during the quarter. While the growth in agriculture seems very encouraging at 3.5% y-o-y, this is largely due to the very weak base of 2% y-o-y. While the crop outputs are high, it is too soon to call a bottom for the farm economy and expectations of a revival in rural demand may yet be belied. As of now, a 6% GDP growth in FY21 looks unlikely.


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