Twelve lead in­di­ca­tors for GDP num­bers

Mint ST - - MARK TO MARKET - Manas Chakravarty

Will the gross do­mes­tic prod­uct (GDP) num­bers, sched­uled to be out on Thurs­day, sig­nal the long-awaited, much-an­tic­i­pated, yet elu­sive re­cov­ery? GDP growth, at con­stant prices, has steadily de­clined ev­ery quar­ter from the eye-pop­ping 9.1% reached in the March 2016 quar­ter to a tepid 6.1% in the March 2017 quar­ter.

Gross value-added (GVA) growth has fol­lowed a sim­i­larly unim­pres­sive tra­jec­tory. Just as busi­nesses were re­cov­er­ing from de­mon­e­ti­za­tion, the goods and ser­vices tax (GST) led to another bout of dis­rup­tion, which will be a damp­ener for the June quar­ter. Are there off­set­ting fac­tors?

Here are a few pointers to the GDP print on Thurs­day:

1) The base ef­fect. Year-onyear GVA growth in the March 2017 quar­ter was 5.6%, on top of 8.65% growth a year ago. Growth in the June 2016 quar­ter was 7.56%. That should pro­vide an op­ti­cal boost to the June 2017 data (Chart 1). Other things re­main­ing the same— al­though they rarely DO—GDP and GVA growth should be higher than for the March quar­ter.

2) Cen­tral gov­ern­ment ex­pen­di­ture was up a siz­able 27% in the June 2017 quar­ter com­pared to a year ago (Chart 2). Sim­ply put, the gov­ern­ment pro­vided a strong boost to GDP in the June quar­ter.

3) Cen­tral gov­ern­ment capi- tal ex­pen­di­ture in­creased by a hefty 39.5% in the June 2017 quar­ter. But gov­ern­ment capex is not enough to move the nee­dle.

4) The In­dex of In­dus­trial Pro­duc­tion was higher by 2% year-on-year in the June 2017 quar­ter, com­pared to 3.1% in the March quar­ter. The in­dex for cap­i­tal goods was neg­a­tive in the June quar­ter. Cap­i­tal for­ma­tion is, there­fore, un­likely to have con­trib­uted much to growth.

5) There’s been ma­jor de­stock­ing in the man­u­fac­tur­ing sec­tor, chiefly in pe­tro­leum prod­ucts, but also in the con­sumer goods sec­tor. That will mean lower gross cap­i­tal for­ma­tion.

6) The base ef­fect should re­sult in agri­cul­tural growth be­ing lower than in the March quar­ter.

7) The Cen­tre for Mon­i­tor­ing In­dian Economy (CMIE) data­base shows that op­er­at­ing prof­its for the cor­po­rate man­u­fac­tur­ing sec­tor were down 16.8% year-on-year for the June quar­ter (Chart 3). Tak­ing this as a proxy for value added, man­u­fac­tur­ing GVA growth should be af­fected.

8) The CMIE data­base shows that the op­er­at­ing profit of ser­vices com­pa­nies (other than fi­nan­cial ser­vices) fell by 1.9% in the June quar­ter. Nev­er­the­less, that’s a big im­prove­ment over the March 2017 quar­ter re­sults for this sec­tor. That pro­vides clues for ser­vices sec­tor GVA.

9) Growth in profit after tax, net of ex­cep­tional items, was much lower for fi­nan­cial ser­vices com­pa­nies in the June 2017 quar­ter, com­pared to the March quar­ter.

10) What about con­sump­tion growth? Growth in op­er­at­ing prof­its of con­sumer goods com­pa­nies has been bet­ter in the June than in the March quar­ter, ac­cord­ing to the CMIE data­base. It’s worth re­mem­ber­ing though that many con­sumer goods com­pa­nies are not listed and hence not in the data­base. Com­pa­nies in whole­sale and re­tail trade saw their ag­gre­gate op­er­at­ing profit fall from a year ago.

11) The trade bal­ance has wors­ened for the June 2017 quar­ter com­pared to a year ago. That in­di­cates the ex­ter­nal sec­tor is go­ing to be a drag on growth.

12) Take a look at what the Re­serve Bank of In­dia’s (RBI’S) pro­fes­sional fore­cast­ers have to say (Chart 4). The lat­est RBI sur­vey was con­ducted in July 2017, so it’s likely they have re­vised their fore­casts lower, as the full ex­tent of the GST dis­rup­tion has be­come clearer. Bear in mind, though, that this GDP se­ries has a re­mark­able abil­ity to sur­prise and con­found fore­cast­ers.

The GDP data will tell the RBI mon­e­tary pol­icy com­mit­tee whether their fears of slower growth are in­deed true and will there­fore be an im­por­tant fac­tor in de­cid­ing whether to cut in­ter­est rates fur­ther.

For the markets, which have been ral­ly­ing on a heady cock­tail of faith and liq­uid­ity, bet­ter-than-ex­pected num­bers will be an ex­cuse to push markets up, while a worse-thanex­pected print could lead to a lurch down­ward, be­fore the data is hastily dis­missed as back­ward-look­ing and ir­rel­e­vant.

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