The latest growth numbers were perplexing in many ways. The headline growth at 40bps appeared lower than estimated average of 1% but that wasn’t about it. A deeper dive into the numbers intensifies some knowns and brings to the attention some unknowns. The standard caveats to growth numbers continues to apply- data collection is sampled and is often subjected to revisions. Yet I believe there are a few themes are unfolding and the recent numbers validate them.
- K is turning out to be the winning alphabet– While we did have some alphabet soup on shape of recovery ranging from U,V, L to W, K is appearing to be the most predictable winner. Private consumption in Q3 contracted by 2.5% while topline of Autos+ consumer durables+ retail expanded by 10%+(atleast 6% in real terms). Quite unequivocally, it is the unorganized and informal sector that continues to be in pain. India’s exports might have flattened but labour intensive exports (Gems and Jewelry, textiles, leather etc) are still contracting. The much touted manufacturing is back into growth but again labour intensive component in IIP manufacturing is contracting by atleast 10%. As a result of continued shocks from demonetization to GST to Covid, not only is it contracting year on year, continuous contraction has severely affected the overall output levels.
- Fiscal support is muddled- Both Government consumption expenditure and Public Ad & Defense have contracted in Q3. Then what happens to Central expenditure rising by 15% + in Q3? Clearly, while the Centre is spending more, the states’ and local bodies’ expenditure is decelerating. Infact, the spread between SDL and Gsec yields is whopping 150bps+, indicating that it might not be as easy for them to borrow their expenditure. This puts into question the overall optimism from a supposedly expansionary fiscal policy. Apr-Jan central government has spent about INR 25 tn of the budgeted INR 34 tn, will it spend INR 9 tn in the last two months or will it cut back on expenditure? From growth perspective, the complexion of expenditure matters more than the quantum.
- Value addition will grow but headline number not so much: Given the CSO’ release and outlook, Gross Valued Added (GVA) will immensely outperform Gross Domestic Product (GDP) in Q4. This is owed to huge subsidy payments (GDP is GVA adjusted for taxes and subsidies). This explains the puzzle- if government expenditure is supposed to grow, why have the growth forecasts not been revised upwards? The answer lies in the complexion of the expenditure, most of which is subsidies and arrears, failing to have any real impact on growth. Higher the subsidies, lower the GDP vis-à-vis GVA. GVA, therefore, will be a better matrix to study growth in the coming quarters.
- Investments are surprisingly up- Most indicators have been betting on low Capacity utilization, lack of ‘animal spirits’, fall in projects etc. but on the contrary, investments are up by 2.5% in Q3 (albeit aided by low base but 12% Q-o-Q growth shows pickup in momentum). This provides further strength to the hypothesis of better capex cycle ahead of us, while taking a harmonious view of the economy. ‘Construction’ and ‘Financial Services, Real Estate and other prof services’( real estate alone forms 60%+ of this category), has grown by 6%+. IIP capital goods and infra/construction are clocking some expansion. Import of capital goods is growing. These numbers put into perspective reveal the revival in the capex cycle. More force continues to be needed.
- An incomplete recovery but optimism to get better is validated- While there are obvious caveats to this bipolar economic recovery, the optimism to heal gradually is validated. The fiscal and monetary heavy lifting needs to continue and probably get more focused to the laggards(informal sector and contact intensive services). With non food credit growth subdued at 5.7%, some structural issues still need ointment. Risk on might be the case for assets, not yet for the economy.
Views expressed above are the author’s own.