GDP growth seems to be changing course, rising 6.3% in the second quarter ended September 30, 2017, after five straight quarterly declines.
The pace is expected to quicken in the ongoing second half, which would crank up India’s GDP growth for this fiscal to 6.8%.
The drivers in the second half will be a low-base effect (growth had slipped to 6.5% in the second half of last fiscal), dissipating impact of demonetisation, and gradual stabilisation of the GST regime.
The consumer continues to be the primary driver of the economy, given that private consumption rose 6.5% in the second quarter compared with just 4% 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 Pay Commission recommendation by states along with farm loan waivers, and,
3) Two consecutive years of adequate rains and rising rural wages. Real rural wages grew at 4.8% this fiscal, 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.
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 fiscal 2017 from 1.4 times in fiscal 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, urban infrastructure, and affordable housing over the next couple of quarters.
Government’s bank recapitalisation move would at least improve banks’ ability to lend. This is positive for investment cycle recovery, but slower growth in the last two quarters has pushed it back a bit. Hence, investment 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, anaemic growth in sectors such as construction (with high potential to create jobs) is worrisome.
The growth outlook for the remaining part of the fiscal year is not without risks, though. If Goods and Services Tax glitches take time to resolve, production, and particularly exports, can take a beating.
Exports have grown slower than imports in Q2 and this acts as a drag on GDP. Exports of goods and services have grown at 1.2% in the first half compared with import growth of 7.5%. 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.
Author is Chief Economist, CRISIL