‘Need more traction in jobs-heavy sectors’

GDP (gross domestic product) growth seems to be changing course, rising 6.3 per cent in the quarter ended September 30, after five consecutive quarterly declines.

We expect the pace to quicken in the ongoing second half, which would crank up India’s GDP growth for this financial year to 6.8 per cent.

The drivers in the second half will be a low-base effect (growth had slipped to 6.5 per cent in the second half of last financial year), dissipating impact of demonetisation, and gradual stabilisation of the goods and services tax (GST) regime.

The consumer continues to be the primary driver of the economy, given that private consumption rose 6.5 per cent in the second quarter, compared with 4 per cent growth in investment. There are three reasons for this: 1) Swifter transmission of repo rate cuts to lending rates across instruments after demonetisation, which led to softer rates, and retail/personal loan focus of banks

2) Implementation of the Pay Commission recommendation by states along with farm loan waivers

3) Consecutive years of adequate rains and rising rural wages. Real rural wages grew at 4.8 per cent this financial year, which is the fastest in the in past four years.

CRISIL’s rating actions also show better credit profile of consumption-facing sectors compared with investment-facing ones.

Despite the efforts of the government to prop up public investments and improvement in India’s ‘ease of doing business’ rankings, the overall investment cycle remains depressed. Investments as a proportion of GDP have been falling in the past six years and the best-case scenario for this financial year is no further fall in the investment ratio.

Private investments in manufacturing continue to be constrained by excess capacity and in infrastructure-related sectors by de-leveraging. The highly leveraged companies in these segments have focused on improving their capital structure, rather than undertaking fresh investments. This is evidenced in the pool of CRISIL-rated companies, where the debt-equity ratio has improved to 1.1 times in the financial year 2017, from 1.4 times in financial year 2015. The interest coverage ratio, too, has improved from 2.3 to 2.6 in the same period.

A few segments where investment activity is likely to stay relatively healthy include, roads, renewables power T&D (transmission and distribution), urban infrastructure, and affordable housing over the next couple of quarters.

The government’s bank recapitalisation move would at least improve banks’ ability to lend. This is positive for the investment cycle recovery, but slower growth in the past two quarters has pushed it back a bit. Hence, the cycle will be slow to rebound.

While a pick-up in manufacturing is welcome from an employment perspective, overall growth continues to be driven by sectors with lesser ability to absorb labour.

In the context, anemic growth in sectors such as construction (with high potential to create jobs) is worrisome.

The growth outlook for the remaining part of the years is not without risks, though. If GST implementation glitches take time to resolve, production and, particularly exports, can take a beating.

Exports have grown slower than imports in Q2. This acts as a drag on GDP. Exports of goods and services have grown 1.2 per cent in the first half compared with import growth of 7.5 per cent. Also, a possible cut in capex by states in response of rising fiscal stress can also emerge as a downside risk to the growth outlook.

The consumer continues to be the primary driver of the economy, given that private consumption rose 6.5 per cent in the second quarter, compared with 4 per cent growth in investment