9 min read.Updated: 18 Feb 2020, 10:44 PM ISTVivek Kaul
High-frequency indicators show a small festive season consumption bump in late-2019. But is it a mirage?
In this scenario, govt spending will continue to be important. But the economy is not generating enough taxes for the govt to spend. The tax kitty was down 10.6% in Q3.
Gross domestic product (GDP) growth, a measure of economic growth, has been at 4.8% for the first six months of fiscal year 2020 (FY20). Within this, private consumption expenditure has grown by just 4.1%.
The economic growth for FY20 is forecast at a modest 5.7%, whereas private consumption expenditure growth has been forecast at 7.2% for the full year. This basically means economic growth during the second half of the year needs to be much faster than the first.
The $5 trillion question is: will that happen?
Ever since India’s GDP got infected by the slowdown bug, we have analysed the overall state of the economy by looking at high frequency economic indicators. The indicators for the October-December 2019 period, or the third quarter (Q3) of FY20, have just come out. In short, things weren’t as bad as they were in July-September 2019 (Q2). But having said that, many economic indicators—from two-wheeler sales to railway passenger traffic—continue to contract. In this scenario, expecting private consumption expenditure to grow by 7.2% in FY20 is a bit of a stretch. Also, investments remain in the doldrums. This puts a question mark on the expected yearly projected growth rate of 5.7% too. There might be some green shoots here and there, but the overall recovery of the economy, if at all that happens, may evidently take time. Let’s look at the details.
Pvt consumption expenditure:
In India’s case, private consumption expenditure forms around three-fifths of the overall GDP. A slowdown in growth of private consumption expenditure was at the heart of the Indian GDP growth slowing down to less than 5% (in real terms) during the first half of FY20 (April-September). Private consumption expenditure essentially reflects the money spent on buying goods and services.
Domestic passenger car sales: A contraction of 8.5% during Q3 was better than the 37.3% crash in Q2.
Car sales are a very good urban consumption indicator simply because people buy a car when they are feeling confident about repaying the loan they may have to take on. They also need to have the requisite amount for the down payment. This confidence stems from a confidence in their economic future.
Some of this confidence seems to have been restored in Q3. Total car sales stood at 476,081 or around 29% more than the total number sold during Q2.
Having said that, this is the lowest number of cars that have been sold during the festival season since Q3 FY15, when 469,205 cars were sold. In fact, even during Q3 FY12 (a year when GDP slumped), 474,845 cars were sold. Effectively, over a period of eight years, the absolute number of cars sold during the festival season has barely gone up.
This suggests a clear long-term stagnation in car sales. This shouldn’t seem surprising because there has been a clear stagnation in urban income growth, which can be seen from the fact that salaried income growth (measured through income-tax returns filed) between assessment year 2012-13 and assessment 2018-19 went up by just 3.6% per year.
Domestic two-wheeler sales: Again, while there was a contraction of 14.9% in Q3, it was at least slightly better than the 20.5% fall in Q2.
The total number of two-wheelers sold during the period stood at 4.22 million. This was lower than the 4.68 million sold during Q2. Two-wheeler sales are a much broader economic indicator than car sales simply because more people can afford to buy two-wheelers and their sales reflects the economic state of mind of a larger section of the population.
The 4.22 million units sold during the three-month period is the lowest number of two-wheelers sold during the festival season since Q3 FY17.
Domestic tractor sales: This is a good indicator of how the rural rich are feeling. Domestic tractor sales fell by just 6% during Q3 FY20. They had fallen by 9.9% in Q2 and 14.1% in Q1. Prima facie, this does suggest that things have improved. But there is a twist to this.
As of 1 January 2020, total rice and wheat stocks with the Food Corporation of India (FCI) stood at 56.5 million tonnes (mt). This is nearly 164% more than the 21.41 mt that the state-run organization needs to maintain as of 1 January in order to fulfil the operational stock and the strategic reserve requirements.
Hence, FCI has been buying excess rice and wheat than what is required. As per a report by the High Level Committee on Reorienting the Role and Restructuring of the Food Corporation of India, only 5.8% of the agricultural households sell rice and wheat to any procurement agency (including FCI). These are basically the rural rich.
The excess purchase of wheat and rice has ensured that tractor sales jumped to 204,127 units during Q3 against 167,257 units in Q2. This is basically an impact of government spending in the wrong area.
Housing sales: As per Anarock Property Consultants, the overall number of unsold homes across the top seven cities stood at 648,400 units. This was down by 4% since 2018. These homes on the whole are worth ₹4.64 trillion. This means that an average home in the top seven cities costs around ₹71.6 lakh, which is very expensive and explains why these homes are going largely unsold.
The interesting thing is that home loans given by banks continue to grow at a very good pace. During Q3, they grew by 17.6%. In fact, non-priority sector home loans are growing at an even faster pace. Non-priority home loans are those above ₹28 lakh in metropolitan centres and loans of ₹20 lakh in other centres.
This means that people are buying houses, but not those built by builders. They are buying homes which investors have bought and held on to over the years.
Bank retail loans: The growth of retail loans of banks slowed to 15.9%. These loans had grown at 16.6% in Q2. Importantly, the growth of credit card outstanding at 25.3% and personal loans at 19.4% are two of the faster growing segments in retail loans. This is happening at a time when income growth has substantially slowed. This is a good indicator of how people have kept consumption going (as much as they could) without a good growth in income.
Volume growth of fast-moving consumer goods firms: The growth in unit sales of Hindustan Unilever continues to be at 5%. And explains why more firms are relying on smaller packets to drive sales.
Non-oil non-gold non-silver imports: Over the years, this has become a good indicator of consumer demand, given that a lot of what gets consumed these days tends to be imported. The indicator fell by 10.7% in Q3, compared to a fall of 5.8% in Q2. This is also a reflection of a slowdown in exports, as a lot of inputs into goods that are exported are imported.
Passenger traffic on railways: The total number of passengers travelling by Indian Railways fell by 1.2% in Q3. This indicator had fallen by 2.1% in Q2. The number of passengers using the non-suburban services of Indian Railways during Q3 stood at 902 million, lower than even Q2 FY13 when it was over a billion.
Domestic passengers handled by airports: This is one indicator which has constantly done well over the years (irrespective of how the airlines operating in India have performed). Domestic passengers handled by airports grew by 4.9% in Q3. In fact, the total number of passengers handled stood at an all-time high of 92.7 million. On the flip side, the cargo moved by airlines was down 1.3%.
The Economic Survey of FY20 points out that the “declining rate of fixed investment decelerates GDP growth with a lag, which eventually causes a deceleration in the growth of consumption as well. This lag between rate of fixed investment and its impact on GDP growth is seen to be of three to four years".
India’s investment to GDP ratio peaked at 35.8% in FY08 and has been largely falling since then. The ratio in FY20 is expected to be at 28.1% of GDP, the lowest since FY01, when it was at 26%. In this scenario, what do the economic indicators that represent investment suggest?
Domestic commercial vehicles sales: Faster commercial vehicle sales indicate robust activity on the infrastructure and industrial front. In Q3, sales fell by 17.2%, which was an improvement over the 35% fall between Q2.
Bank lending to industry: The overall outstanding loans to industry in Q3 grew by just 1.6%. It had grown by 2.7% in Q2. This is despite the industry benefitting from a huge cut in income-tax rates. Clearly, the industry is not in the mood to borrow and expand currently. Indeed, that is not surprising at all.
As the Economic Survey of FY20 points out: “Higher growth of consumption improves the investment outlook, which results in still higher growth of fixed investment that further accelerates the growth of GDP, inducing a still higher growth of consumption." The industry is waiting for consumption to rebound sufficiently wherein its current capacities are adequately utilized, only then will it expand.
Revenue-earning rail freight: This indicator contracted by 1% in Q3. It had contracted by 3.7% in Q2. The interesting thing is that revenue-earning rail freight has grown by just 1.9% per year between December 2014 and December 2019, which again shows how long the signs of an impending slowdown have been around.
New investment projects announced (in terms of value): This indicator has grown by 45% in Q3, after contracting by 30% in Q2. But there is caveat. As Mahesh Vyas, managing director and chief executive of Centre for Monitoring Indian Economy (which is the source for this data) points out: “The largest project announced in the September-December 2019 quarter was a proposal by InterGlobe Aviation to purchase 300 A320neo family aircraft." InterGlobe Aviation runs India’s largest airline IndiGo. These aircraft will not be made in India, so are not going to benefit the Indian economy in a direct way. Other than this purchase, three other projects “together account for over 80% of the total new investment proposed".
If we look at new investment projects in terms of number of projects, it presents a different picture. The number of projects announced during Q3 fell by 44% to 473. The quarterly data for this indicator is available since January 2005 and this is the lowest number of projects announced during any quarter since then.
Gross tax revenue collected by the government: The taxes collected by the government were down 10.6% in Q3. This is the first time that tax collection has contracted year-on-year since 2009. The major reason for this lies in the corporate income tax cut, which was announced in September 2019. Corporate tax collections are down 34.5% in Q3. One impact of this is seen in the tax revenues that the central government shares with states. The share of the state government was expected to be ₹8.1 trillion in FY20. It has been slashed by around a fifth to ₹6.6 trillion.
The impact of this fall will be felt in Q4, as governments will have to slash expenditure. This will impact overall economic growth. Along with this, the number of tax notices sent out will go up.
Net exports were down 1.1% in Q3 in comparison to a contraction of 3.8% in Q2.
To conclude, things seemed to have become slightly less worse in Q3 FY20. In this scenario, government spending will continue to be important. In the first half of the year, government spending grew by 12.3%. It is expected to grow by 12.6% during the course of the full year. The trouble is that the economy is not throwing up enough taxes for the governments to spend.
Vivek Kaul is an economist and author of the Easy Money trilogy.