Even as India’s economy continues to grow at a healthy pace — an above 7 per cent score is on the cards — of late, there has been some debate on the underlying momentum. This is on account of the report cards of some companies in the consumer goods space. Their performance is being said to reflect “urban stress”. Even if that is taken into account, several economic indicators appear positive. The GDP data will be released later this week.
The purchasing managers index for both services and manufacturing has been in the region of 57-60 for the last three months. Any number above 50 is positive, and the average so far this year is above 60 for the composite index — the highest in the last five years. Alongside, GST collections in the first seven months of the year have topped at Rs 12.74 lakh crore. This is higher than last year’s tally of Rs 11.64 lakh crore. Two-wheeler sales have risen by 16 per cent for the first seven months of the year. Passenger car sales had slowed down in September over August but rose by 9 per cent in October when the festival season began.
The lament of some companies on subdued consumption could be attributed to the “shradh” period when believers desist from buying consumer goods as part of their practice of abstention. This manifested in low sales of automobiles in particular leading to a build-up of inventories. This, however, changed in October with this segment showing an upward movement.
So while second-quarter growth would be less than 7 per cent at around 6.8-6.9 per cent, there is likely to be a substantial pick up in the second half of the year. A critical factor is the rural economy. Rural demand has been muted in the last couple of years due to a combination of lower farm output and higher inflation. A good kharif crop could address the first part of the problem. The area under cultivation this year is much higher compared to last year, pointing to good harvests for cereals, pulses and oilseeds. The reservoir levels are at around 87 per cent, auguring well for both the rabi crop as well as allied activities. Therefore, farm output growth this year should be at a robust 3.5-4 per cent, and this could support demand.
Inflation, however, remains a worrying proposition. At 6.2 per cent, it is being driven by food prices. The positive sign here is that the next crop of onions and tomatoes should be arriving by December. The kharif harvest should lead to an improvement in supplies of pulses, a major pain point in the past. Therefore, food inflation should moderate by the end of this calendar year with the base effect also kicking in December. While one has to be mindful of the course of inflation, given the October surprise, a moderation should help revive demand.
This year, the investment momentum has been healthy even though the start was slow. The general election caused a slowdown in the central government’s capex. States too were affected. While private investment tends to align with government capex, sources of funding, namely, bank credit, debt issuances as well as ECBs, point to a “K” shaped pattern in investment activity.
The demand for funds has come from sectors related to infrastructure activity, including metals, cement, machinery, chemicals and power. The housing sector has been doing well at the premium and middle levels and the momentum has spread to tier-2 and tier-3 cities. Power sector investment is revolving around renewables, which have seen large capacity increases. A backward link has been witnessed between government capex on roads and railways as well as urban development and industries such as steel, cement and machinery which have gone in for fresh investment. However, when it comes to consumer goods industries, it does appear that the existing capacity is not being used, which has come in the way of new investments.
With the two main engines of consumption and investment looking positive, there is reason to believe that overall growth will remain above 7 per cent this year — the Bank of Baroda’s forecast is 7.3-7.4 per cent. This, however, should not lead to complacency given that growth last year was 8.2 per cent.
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So far, the RBI has maintained its growth forecast at 7.2 per cent. This has given it comfort for continuing with its anti-inflation policy stance. The inflation rate virtually rules out any rate cut in the December policy. While a decision on the rate cut could come in February, depending on how the inflation number turns, global factors cannot be ignored. The victory of Donald Trump does suggest some action on immigration, import tariffs and corporate taxes, all of which can be inflationary.
The MPC is likely to factor this in its deliberations.
The writer is Chief Economist, Bank of Baroda. Views are personal
