The latest rounds of high frequency indicators have cheered analysts and investors, prompting many to say growth may finally have bottomed out. To be sure, some of the data is encouraging, especially the remarkable turnaround in the sales of big commercial vehicles that are considered by many to be a proxy for the economy. Sales at Ashok Leyland and Tata Motors jumped 82% and 68%, respectively, in December. Much of this was definitely the effect of a low base while some of it was due to advance purchases, ahead of mandatory alterations to vehicles. Nonetheless, the numbers were impressive. But, not too many sectors did as well, and a look at performances in the April-November period suggests it is a bit of a mixed bag, not surprising given the rollout of the GST. So, while cement has barely grown, except in the last couple of months, consumption of steel has risen by just about 3-4% in the period. Railway freight tonnage increased by just 4.7% between April and October, moderating to just 3% in November. Disaggregated data shows market leaders or relatively strong players are doing much better. For instance, between April and December, Maruti Suzuki’s sales were up 15.5%, but other car-makers reported much weaker sales. While HeroMotoCorp’s volumes rose 10.7%, domestic sales at Bajaj Auto fell 7%. Had there been greater aggregate purchasing power, more companies should have reported decent growth.
The question is whether the economy can grow at a sustained 7%-plus from here on. Unlikely, given the economy faces three major headwinds. The first is the elevated price of crude oil—50% up from the lows of June—which will push up raw material costs for industry, drive up imported inflation and inflate the subsidy bill. The second is the much stronger rupee, now at a two-and-a-half year high, which will make exports less competitive at a time when they are already doing badly—in some months, they have contracted, on a very low base. And the third is the turn in the interest rate cycle which will, six months from now, reflect in the higher cost of borrowing. The challenges could have been overcome had there been a big investments push. But the private sector has neither the inclination nor the money to add capacity, partly because there is more than enough. This is reflected in CMIE data, which showed new investment proposals in the December quarter came in at Rs 76,800 crore, a 13-year low, compared with Rs 1.1 lakh crore in the September quarter.
Tata Steel’s Kalinganagar expansion accounted for a third of this. The growth in the domestic order-book for a clutch of engineering companies in HIFY18 has been about 4% y-o-y, reflecting how sluggish investments are just now. Also, with large capacities of steel, cement and power on the block—via the IBC or otherwise—those business groups that can afford to buy, can pick up these at prices probably lower than the replacement value. In other words, apart from some sectors—renewable energy, roads or ports—the demand, at this this point in time, doesn’t necessitate too much fresh capacity. A glance at the big ticket investments over the last few years shows the biggest bet has been taken by the telcos—Reliance Industries has spent more than Rs 2 lakh crore while Vodafone has spent some Rs 40,000-45,000 crore. Much of India Inc remains over-leveraged—the GMRs, GVKs, Lancos still owe the banks, and have been selling assets to de-leverage their balance sheets.
The government has tried to step in and fill the gap—CMIE data highlights that in 9MFY18, the government’s share in project announcements increased to 48%, from 46% in 9MFY17. But the spends are modest given the capex planned for FY18, including those by government entities, was Rs 6.9 lakh crore, a mere 1% increase. While allocations for FY19 could see a big jump—ahead of the general elections scheduled for mid-2019 and some key state elections in 2018—the increase is unlikely to be substantial. More critically, it will be a year before the projects take shape and are able to impart momentum to the economy. Indeed, the experience with roads, where the government has had the most success, shows a long lead period before projects are finally commissioned. In many instances, the cost overrun has been 15-20% and, therefore, the number of kilometres built hasn’t really gone up too much. To be sure, there will be projects funded by a JICA—like the bullet train venture has been—or by foreign investors, but it is not clear how much of that will happen.
Even otherwise, the government’s finances are pressured by subsidies and unproductive expenditure—it has been compelled to borrow an additional Rs 73,000 crore in 2017-18. While indirect taxes could see some buoyancy next year, once the GST stabilises, it is hard to see any meaningful rise in direct taxes collections at a time when job losses are high. The low level job creation is threatening to hurt the consumption story which has held up reasonably well so far. In Q2FY18, however, private final consumption expenditure slowed to 6.5%, the slowest in at least five quarters while government consumption saw a marked slowdown, to 4.1% y-o-y. Worryingly, rural or small town India, a big catchment for companies , isn’t displaying too much purchasing power due to the slower rise in real incomes. The rise in rural wages, of above 6% between May and October, moderated to 4.9% in November. That’s after two good monsoons.
Household demand for big ticket buys such as homes has been flagging—the rate of growth in home loans from banks has slipped to 10%, compared with 16-17% in September 2016. On the other hand, there’s considerable appetite for consumer durables and electronics in an under-penetrated market; this is being satiated with loans that are growing 22-23% annually and poised to hit `2 lakh crore by 2021. However, for the economy to get a big push, the real estate sector needs to takes off. Only once that happens can allied sectors such as construction—which generate thousands of jobs—get a boost. In the near term, there’s no big event or big policy that could jump-start either investment consumption. The government’s strategy is to spend its way out of trouble, but the amount hasn’t been large enough to make up for the shortfall of the private sector. That means the economy—which clocked 5.7% in Q1FY18 and 6.3% Q2FY18—will probably grow at close to 6.5-7%, buoyed by pre-election spending. At this stage, even 7.5% looks difficult.