Business Standard

A lowgrowth, lowinflati­on phase

While it is imperative to stick to the path of fiscal consolidat­ion, there is no harm if the government spends the possible windfall arising out of GST on pushing capital expenditur­e rather than shoring up the revenue mobilisati­on numbers

- SOUMYA KANTI GHOSH

The Q1 GDP data released on August 31 was disappoint­ing. Beneath the data internals however, there are some stark realities which are important to understand for better policy decision making.

To begin with, nominal gross value added (GVA) increased by only 7.9 per cent in Q1. Thus, we don’t agree with the Central Statistics Office narrative that increase in Wholesale Price Index prices/higher GVA deflator (GVA deflator declined from 5.4 per cent to 2.2 per cent) was one of the reasons for the slowdown. The decline of GVA could be due to factors like the lingering impact of demonetisa­tion and destocking activities undertaken pre-GST (goods and services tax) implementa­tion. Let us now examine these factors in greater detail.

Industry grew by 4.5 per cent in Q1 FY18 (7.4 per cent in Q1 FY17), owing to a significan­t decline in mining (-0.7 per cent) and miniscule growth in manufactur­ing (1.2 per cent). The negative growth in mining is quite surprising (the average of last three years’ first quarter mining growth is 9.8 per cent) as mining activity is generally buoyant in the pre-monsoon season. We believe Coal India is shutting down mines across some states as state electricit­y boards are now sourcing in part their electricit­y requiremen­t from renewables, negating the demand for coal. As the RBI (Reserve Bank of India) Annual Report emphasises, “In the power sector, higher capacity addition in renewables may pose multiple challenges with regard to the integratio­n of renewables into the electricit­y grid and the possible dampening effect on already worsened thermal Plant Load Factor (PLF).”

The slow growth in manufactur­ing GVA is quite consistent with the negative growth in corporate GVA as both are correlated. The corporate GVA decelerate­d since Q3 FY17 and exhibited negative growth of 8.4 per cent in Q1 FY18 (based on the data of 2,210 non-financial companies). Additional­ly, a closer look at the inventory destocking from the GDP data indicates that while it is true that this has happened on a q-o-q basis (a 3.8 per cent decline in Q1 FY18 over Q4 FY17 at constant prices but still lower than in Q3 FY17 over Q2 FY17), there is still an increase of 1.2 per cent on a y-o-y level. There have been similar declines in Q1 of FY17 and FY16 also on a q-o-q basis. Clearly, the slowdown in manufactur­ing should be looked beyond the prism of destocking.

Agricultur­e and allied activities grew at 2.3 per cent in Q1 (vis-à-vis 2.5 per cent). This low growth was not entirely unexpected as the average agricultur­e growth in first quarter of the last five fiscals was 2.5 per cent. However, the concern is nominal GDP growth in agricultur­e is nearly zero. Agricultur­e, which accounts for 17 per cent of the GDP, is showing signs of glut. This does not translate into purchasing in rural areas, thus denting the demand. The GVA deflator for agricultur­e was negative in Q1 FY18, the first time since Q2 FY15.

Service sector growth jumped to 8.7 per cent and this was a saving grace. However, the growth rate in this sector was under fortuitous circumstan­ces, as the trade sub-segment growth jumped because of destocking, but also the communicat­ion and hotel segment contribute­d through increased competitio­n with the entry of Reliance Jio and arrival of foreign tourists.

In fact, the contributi­on of any possible destocking had both a positive and negative impact on GDP. Thus, while manufactur­ing sector weighted contributi­on growth declined by 80 basis points, there was an exact 80 basis point increased contributi­on in the trade sub-segment within services. Thus, to be fair, the impact of GST was neutral across sectors.

The sub-segment financial sector growth improved markedly to 6.4 per cent in Q1 on a sequential basis, because of a push in profession­al services (around 73 per cent share). We believe the growth in profession­al services is because of hiring of consultanc­y services by corporates ahead of the implementa­tion of GST and insolvency code. The public administra­tion sub-segment expanded by 9.5 per cent driven by a 25 per cent jump in real government revenue expenditur­e net of interest payments.

Going forward, we believe the growth of manufactur­ing and service sectors may turn out weak in Q2 as the destocking in manufactur­ing sector activity has well continued in Q2 at least till midAugust. As far as the service sector is concerned, the growth in trade segment will moderate from high levels with GST being implemente­d. The government subsegment may see a slowdown as there has already been a lot of frontloadi­ng of expenditur­e in Q1 FY18. The banking subsegment, however, may continue to grow with higher demand for consultanc­y services probably continuing.

So, what next? We are possibly in a situation of low (g)flation, implying low growth and low inflation. On a lighter vein, note that the word g stands for growth and is silent indicating that in any discussion­s of inflation growth tradeoff in the Indian context, growth perhaps takes the backseat. While it is imperative to stick to the path of fiscal consolidat­ion, there is no harm if the government spends the possible windfall arising out of GST on pushing capital expenditur­e ahead rather than shoring up the revenue mobilisati­on numbers. Any cutback in expenditur­e at this point will be deflationa­ry when private investment is unlikely to be forthcomin­g unless resolution starts happening in Q4 FY18.

We would also expect the government to start sorting out some of the nit-pickings of GST implementa­tion in the interregnu­m and not change the GST rates too often. For example, take the real estate sector. There is an 18 per cent GST on real estate now. However, there is an abatement of 1/3rd for value of land, bringing down the effective GST rate to 12 per cent (except low-cost housing). It was expected that the builders will reduce the price of flats as they now get input tax credit. But this has not happened and the buyer is paying the entire GST. Clearly, the builder is to be nudged to reduce the prices, as only then the GST benefits will be beneficial. Also, the housing sector needs a big push by the government in the quest for more employment opportunit­ies.

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 ??  ?? POOR YIELD The low growth in agricultur­e in Q1 FY18 was not entirely unexpected as the average growth in the sector in the first quarter of the last five fiscals was a meagre 2.5 per cent
POOR YIELD The low growth in agricultur­e in Q1 FY18 was not entirely unexpected as the average growth in the sector in the first quarter of the last five fiscals was a meagre 2.5 per cent

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