The latest estimates of gross domestic product (GDP) growth by the Central Statistical Organisation (CSO) show that it is the services sector which is driving growth this fiscal year. While manufacturing and agricultural growth has slowed in the second half, growth in most services continues to accelerate. What’s more, apart from the robust growth in capital formation, there are signs of a bounce in consumer spending.
CSO puts GDP growth for fiscal 2008 at 8.7%, a 90-basis-point drop from the level reached in fiscal 2007. The forecast is a confirmation of the slowdown seen at the micro level, with growth in corporate earnings going down every quarter.
The Sensex ex-oil companies (it’s better to exclude oil companies because of volatility in their profits) saw their profits rise by 22.5% in the December quarter, compared with the year-ago period. This growth rate has been coming down steadily from a peak of 48.8% in the third quarter of fiscal 2007. The subsequent growth rates for the Sensex ex-oil companies are: 37.6% in fourth quarter of fiscal 2007; 35.7% in first quarter of fiscal 2008; 30.6% in second quarter of fiscal 2008; and 22.5% in third quarter of fiscal 2008. The trend couldn’t have been clearer.
The trend seems to be pretty clear on the sales front, too, except for the latest quarter. Year-on-year sales growth for the Sensex ex-oil companies was 35.8% in the third quarter and 22.4% in the fourth quarter of 2006-07; 19.1% in the first quarter of fiscal 2008, 15.5% in the second and 16.1% in the third.
There has been a slight rise in sales growth in the December quarter, but it’s too early to say whether a bottom has been reached, especially in view of the uncertainties in the external sector.
It’s interesting to compare the GDP estimates for the full year with GDP numbers for the first half of fiscal 2008. GDP growth was 9.1% for the first half compared with the estimate of 8.7% for the full year. For the second half, growth is expected to be around 8.4%.
Manufacturing growth was down from 10.2% in the first half to an estimated 9.4% for the full year. That implies a growth of 8.7% in the second half. The construction sector is likely to see an even greater deceleration in the second half, with an estimated growth of 8.6% compared with 10.9% in the first half. That was expected, given the substantial deceleration in bank credit to the housing sector.
It’s significant that GDP estimates for much of the services sector show acceleration during the second half. For instance, growth in “trade, hotels, transport and communication” was at 11.7% in the first half, while the estimate for the full year is 12.1%, implying a growth of 12.5% in the second half of the year. Clearly, growth has been much stronger in the second half.
Similarly, “financing, insurance, real estate and business services”, which grew at 10.8% in the first half of the year, are estimated by CSO to have grown at 11.7% for the full year. That can partly be explained by the huge growth in financial services during the third quarter of the year, when the stock markets were on a roll. Revenue growth in brokerages, for instance, was very high and even banks did well. But after the market crash, that performance is unlikely to be repeated.
It’s pretty clear that the services sector has been propping up growth in the economy this year. The three segments in the service sectors—trade, hotels, transport and communication; financing, insurance, real estate and business services; and community, social and personal services—account for 56% of the estimated GDP in fiscal 2008. But as a percentage of incremental GDP growth in 2007-08, their share was much higher—at 67%.
All the optimistic talk about India’s manufacturing sector becoming more important and increasing its share of the total economic pie needs to be taken with liberal doses of salt. As a matter of fact, the data show the opposite is the case and the share of services in the economy is actually rising.
Slicing the GDP data another way, it’s well known that capital expenditure has been driving growth. The most recent GDP estimates show that gross fixed capital formation is expected to grow at 15.1% this year. However, CSO had earlier said growth in gross fixed capital formation was 15.5% in the first half of the year. That implies a slight slowing down in the second half to 14.7%.
The substantial amounts of money raised through initial public offerings and through external borrowings is likely to continue to drive growth in future. If the slump in the markets persists, it could have some impact on raising capital, but that can easily be made up by borrowing.
A heartening sign is that private final consumption expenditure, which had slowed a lot on account of higher interest rates from a growth of 8.3% in 2005-06 to 7.2% last fiscal and further to 5.6% in the first half of fiscal 2008, is starting to look up.
The CSO estimates put private consumption growth at 6.8% for the full year, implying 7.8% growth during the second half. If CSO is right, we should soon see a rise in consumption demand. The December quarter corporate results of auto companies have seen a rise in sales as well as profits growth.
Mint’s resident market expert Manas Chakravarty looks at trends and issues related to investing in general and Indian bourses in particular. Your comments are welcome at firstname.lastname@example.org