GDP growth not as healthy as it seems MARKET INSIGHT

While high-speed data suggest a major slowdown, February numbers indicate demand revival

The macro data out of Q3 seems to be at odds with the high-speed data from that period. The Central Statistics Office (CSO) estimate is that gross domestic product (GDP) growth was maintained at seven per cent, a full percentage point higher than the International Monetary Fund (IMF)’s projections and well above any independent estimates. What’s more, this growth was supposedly driven by very high private consumption, which grew at over 10 per cent in constant rupee terms. It’s possible that some consumption, which went unrecorded earlier (with cash payments and all taxes avoided), showed up in the formal economy. However, much of the highspeed data suggest a major slowdown as did the long queues in front of banks. Retail loan growth was only up by 0.5 per cent year-on-year (y-o-y) over Q3 (October-December 2015-16), and that was a slow quarter. Overall bank credit to industry grew at five per cent y-o-y, the lowest rate in the past decade. Services and manufacturing PMIs were anaemic in November-December.

Corporate results did show strong profit growth. But, that was mostly due to an uptick in the global metals cycle, a peak in the sugar cycle and a good performance in the energy sector. High private consumption is traditionally reflected in good fast-moving consumer goods (FMCG) performance, and in good automobile and twowheeler performance, etc.

Automobile sales during November-December were down for some big companies, though Maruti did well. The tractor manufacturers also did well. Results for the two-wheeler segment suggested a huge slowdown. FMCG results were flat. Automobile sales continued to decline in January, with 4.7 per cent decline in overall units booked by dealers. Sales of commercial vehicles and two-wheelers continued to taper off but tractors and passenger cars did well again. February numbers have just started coming in with corporates releasing unit off-take to dealers, and the trend seems good. Maruti & Hyundai (not listed) saw sales rising 11.7 per cent and four per cent, respectively. Most other car manufacturers also saw sales going up. Among commercial vehicle (CV) makers, Tata Motors saw 1.9 per cent growth in domestic sales while Ashok Leyland saw 4.9 per cent gains. Mahindra & Mahindra (which has exposure in tractors and CVs) saw a decline of 2.3 per cent overall in February domestic unit sales across all segments; Escorts saw a 29.5 per cent jump. Among two-wheelers, TVS Motor saw 6.2 per cent decline in domestic sales; Royal Enfield saw overall domestic growth of 19 per cent but Hero was down by 4.5 per cent and Honda (unlisted) was up four per cent. Bajaj Auto’s dealer numbers were flat, with 0.3 per cent growth.

It’s been a great year for tractors. The monsoon was normal in 2016 after two bad years. Tractor purchases, postponed during the drought, have finally been made. Maybe dealers have also built up inventory over this period, in anticipation of high future demand.

The automobile industry, with its long value chain and its consumer-facing nature, is a great proxy for broad economic health. It still doesn’t seem to be firing on all cylinders but seem to be growing overall. The industry divides naturally into segments, which could each be a proxy for the economic health and confidence of the target income groups. There is the high-end luxury segment; commercial segments (trucks, three-wheelers and tractors), utility vehicles, midrange cars, cabs, and twowheelers, etc.

In the past four months, the high-end luxury car owner and the middle-income car buyer seem to have been unaffected, or at least not very worried. But, the twowheeler segment had been hit hard, so were three-wheelers and CVs. This is somewhat unusual. Tractors and two-wheeler sales generally rise and fall in tandem. Both are strongly linked to agricultural performance. The CV and mid-end car markets also seem to move together. CVs are driven by anticipated demand in the transport sector and that in turn, seems to coincide with times when the mid-range car buyer is confident.

The disconnections suggest things aren’t quite healthy as it seems at first glance. Consensus opinion is that there should be a strong “rebound in demand”, which is almost frightening if you believe that private consumption was up 10 per cent in Q3. The February numbers do indicate some demand revival. CV and two-wheeler performance should spike sharply if that is a real trend.