BackGDP data cements India’s position as fastest growing major economy
Economy expanded 7.4% in the fiscal second quarter raising hope that the govt's strategy of kick-starting stalled infra projects and reinforcing industrial base has put India on cusp of a rebound
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New Delhi: For 18 months, the government of Prime Minister Narendra Modi had waited for the moment—for evidence that its strategy of kick-starting stalled projects and reinforcing India’s manufacturing base to accelerate economic growth was on the right track.
The moment arrived on 30 November, when official data showed India’s gross domestic product (GDP) growth accelerated to 7.4% in the three months ended 30 September, from 7.0% in the previous quarter.
A spike in industrial activity and higher investment demand paced the faster growth, showed the data, which came on top of surveys signalling a rebound in business and consumer confidence, fuelling perceptions that a sustainable economic revival is finally under way.
“Manufacturing growth at 9.3% in Q2 important growth driver. Will continue to work for bigger success of Make in India," economic affairs secretary Shaktikanta Das said in a message on Twitter.
‘Make in India’ is the government’s flagship programme aimed at attracting investment into manufacturing, whose share of economic output has stagnated at around 15% for decades.
Since it came to power in May 2014, Modi’s National Democratic Alliance (NDA) government has been trying to make it easier for companies to do business in India; as part of the effort, in November, it eased foreign direct investment (FDI) norms across 15 sectors, including defence, civil aviation and broadcasting, to attract overseas funds.
The strategy seems to be working. India attracted record net FDI inflows of $34.9 billion in 2014-15.
Reserve Bank of India (RBI) governor Raghuram Rajan sought to temper any sense of exuberance after keeping the key repurchase rate unchanged at 6.75% in the year’s last monetary policy review on 1 December.
“It is very clear that we are well and truly in the midst of a recovery but with areas of weakness," Rajan said. “Agriculture is growing relatively weakly because of (a weak) monsoon; as a result, rural demand is somewhat weak, so non-durable consumption is relatively weak. Capital goods and public investment are growing fairly strongly. Hopefully, as we go along, some areas of weakness will turn around."
He added: “For example, the kind of investments that is contemplated, construction may start picking up more strongly; that will be very helpful. The kind of measures the government is taking as well as the RBI, for example, the low-income housing, the capital requirement measures that RBI has announced will give some boost to housing."
RBI has cut interest rates by 125 basis points this year, doing its bit to lower borrowing costs and spark a revival in the investment cycle. One basis point is one-hundredth of a percentage point.
India remained the fastest growing major economy, ahead of China, which grew 6.9% in the September quarter. But it needs to grow faster to absorb the 1 million skilled workers that enter the job market every month.
The government needs to push ahead with economic reforms to drive private investment and domestic demand, said Yes Bank Ltd’s chief economist Shubhada Rao.
“Gradual implementation of structural reforms, the subdued inflation, superior quality of fiscal spending and lagged response to policy rate cuts are likely to be important growth boosters for India, going forward," she said
A key reform is the long-awaited goods and services tax (GST), which is aimed at dismantling inter-state barriers to trade in goods and services and economically unify India. According to some economists, it would boost India’s GDP growth by 1-2 percentage points.
A constitutional amendment to pave the way for GST has been held up by political wrangling between the government and the opposition led by the Congress party. Political feuding also derailed a bill that proposed making it easier for businesses to acquire farm land.
In a report released in November, rating company Standard & Poor’s (S&P’s) said the Indian government had made modest progress in several areas, including raising FDI limits and improving power distribution, but needs to do a lot more to revive the investment cycle.
“The (chances for the) passage of GST is 50-50 in this session of Parliament and land reform has been pushed down to the state level. Confidence remains high, but Prime Minister Modi’s ‘constructive incrementalism’ strikes us as too tentative. A well-run central bank and an improved external balance should help support growth," the report said.
S&P’s said it continues to question the sustainability of the 8% growth story but kept its forecasts largely unchanged. “We maintain our 7.4% forecast for this (fiscal) year, but have fractionally lowered our forecasts for 2016-17 to 8.1%, and 8.2% for 2017-18," it said.
The government projects economic growth to be above 7.5% in the year to next March. Most economists expect growth of 7.3-7.5%. In 2014-15, the economy grew 7.3%.
RBI on Tuesday, 1 December, said it was keeping its forecast for 2015-16 unchanged at 7.4% “with a mild downside bias".
In the quarter to September, manufacturing and electricity output grew 9.3% and 6.7%, respectively, against 7.2% and 3.2% in the first quarter. Construction, and trade, and hotel and transport sectors slowed to a pace of 2.6% and 10.6%, respectively.
The large dip in construction came as a surprise because the government has given a significant push to road building This could be because the Central Statistical Office derives its growth for construction from the production of cement and consumption of finished steel, which registered tepid growth of 1.6% and 1.2%, respectively.
The farm sector grew 2.2%, faster than the 1.9% pace in the June quarter, despite monsoon rains being 15% short of the long-period average. About 51% of value-addition in the sector now comes from livestock products, forestry and fisheries that registered a combined growth of more than 6% in the September quarter.
RBI, in its monetary policy statement, said the outlook for agriculture was subdued in view of both rabi and kharif prospects being hit by monsoon vagaries.
“While there are areas of robust growth in manufacturing such as capital goods and passenger cars, weak rural and external demand holds back stronger overall growth. Similarly, while the prospects for a revival in service sector activity have been boosted by optimism on new business, pockets of lacklustre activity such as construction weigh on the overall outlook. The step-up in public capital spending and the easing stance of monetary policy provide the enabling environment for a revival in private investment demand, supported by easing input prices and improving conditions for doing business," it added.
Trade, hotels, transport and communication posted 10.6% growth in what is typically a lean season for the sector. The other components of services, such as “finance, real estate and professional services" (9.7%) and public administration, representing government expenditure, (4.7%), did their bit of heavy lifting.
The lead indicators for the services sector have shown mixed trends. The services purchasing managers’ index increased in October on account of higher new business orders.
Commercial vehicle sales (reflecting transportation demand) and domestic civil aviation passenger traffic accelerated year-on-year. On the other hand, tourist arrivals, cargo handled at major ports, railway freight traffic, domestic and international air cargo traffic, and measures of construction such as steel consumption, slowed.
“Recent policy initiatives relating to rail, port and road projects are likely to improve construction activity, as will the Reserve Bank’s countercyclical reduction of capital charges on low-income housing loans, albeit with gestation lags," RBI said.
Nominal GDP in the September quarter grew 6% as Wholesale Price Index (WPI)-based inflation contracted, while real GDP grew 7.4%.
Crisil Ltd chief economist D.K. Joshi said the economic data was surprising because the GDP deflator has fallen into negative terrain, indicating a deflationary scenario, while in the real economy, there is no deflation.
“Nominal GDP coming below the real GDP was a surprise. The impact of wholesale price deflation has started to overshadow the retail price inflation. If this trend continues, it may make the fiscal deficit and current account deficit numbers look slightly worse than expected," Joshi added.
Growth in the second quarter was more investment-driven than consumption-led.
Gross fixed capital formation (GFCF), which represents overall investment demand in the economy, picked up to a five-quarter high of 6.8%, signalling an investment revival.
But, surprisingly, private consumption demand fell to a three-quarter low of 8.3% in the September quarter. A 23.6% hike in salaries and pensions recommended by the Seventh Pay Commission is expected to boost demand for consumer goods after it is implemented from 1 January 2016.
Joshi said the recovery in investment demand was led by public expenditure, such as on road construction.
“There is yet to be any sign of a pick-up in private investment demand. Investment is also a very volatile component of growth. Sustainable recovery in investment is still some time away," he said.
Various surveys have already indicated a pick-up in consumer and business sentiment. The Business Expectations Survey (BES) by the National Council of Applied Economic Research (NCAER) released on 30 November showed a revival of business sentiment after the Business Confidence Index (BCI) fell for two consecutive quarters.
BCI for the second quarter showed an increase of 6.3% in October over July on a quarter-on-quarter basis. The BCI continued to fall on a year-on-year basis (9.1%).
Another survey by Australia and New Zealand Banking Ltd (ANZ) and research firm Roy Morgan, released in November, showed Indian consumer confidence rebounding strongly in November after dipping in October, buoyed by increased optimism about the country’s economic outlook over the next 12 months as well as the next five years.
The ANZ-Roy Morgan India Consumer Confidence Index rose to 122, up 9.5 points in November against the previous month, pushing the index above its long-term average of 117.
On the economic conditions in India, 59% (up 10 points) of the respondents expect the country to have “good times" financially in the next 12 months, while 14% (down seven points) expect “bad times".
When assessing the country’s long-term prospects over the next five years, more than half the respondents, or 58% (up 10 points), expect India to have “good times", while 8% (down five points) expect “bad times" financially.
Also, 22% (up one point) of respondents said “now is a good time" to buy major household items, compared with 17% (down two points) who believe otherwise.
ANZ chief economist, South Asia, Asean and Pacific, Glenn Maguire, said the rebound in consumer confidence was driven more by long-term factors than short-terms ones.
“There appears to be important medium- to long-term anchors influencing consumer confidence, which we could continue to assess as most likely being ‘Modiesque’. These medium- and longer-term anchors should ensure domestic demand does not slip and India’s economic recovery trajectory remains intact," he added.
Bornali Bhandari, a fellow at the National Council of Applied Economic Research, said that the economy had shown signs of bottoming out, but recovery remains weak and fraught with uncertainty.
“There is improvement in business sentiments and stabilizing of political sentiments. The improvement in sentiments of small and medium enterprises is the best signal this survey shows. The capital goods and services sectors also show improvement in sentiments," she said.
Bhandari, however, said the percentage of respondents saying the “present investment climate is positive" remains low at 43.3% in October, signalling that investment sentiment remains subdued.
“And the continued weak expectations on hiring labour in the next six months and weak confidence in ‘managing unemployment’ imply improvement in business sentiments may not necessarily translate to more jobs in the near future," she added.
RBI, in its monetary policy statement, said early findings of its order books, inventories and capacity utilization survey indicate robust growth in new manufacturing orders in the September quarter, when finished goods inventories declined while raw materials inventories increased.
“While urban consumption is showing signs of a pick-up in some areas such as passenger vehicles sales, rural demand has been weakened by two consecutive deficient monsoons and slowing construction activity. Nevertheless, new project announcements, as measured by the Centre for Monitoring Indian Economy, grew more strongly in the second quarter. It remains to be seen whether growing public investment can crowd in private investment on a sustained basis, despite the still-low capacity utilization," RBI said.
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