Devangshu Datta: Bullish attitude, but scepticism remains

The bright side is that tax collections are up in the April 2016-January 2017 period

The disconnect between India’s high-speed data and preliminary gross domestic product (GDP) estimates for Q3 is startling. The headline number suggests that demonetisation had zero impact and the markets responded positively to that reading. However, most observers expressed some degree of scepticism about data quality.

Global equity markets continued to surge, driven by liquidity. Donald Trump’s policy positions are still being judged as good for America’s financial sector in the short run at least and that has pushed the Dow to record highs. However, tight labour markets have also led to an acceptance that the Fed will tighten sooner rather than later. In fact, most traders seem reconciled to the fact that the Fed might raise the policy rate in its mid-March meeting. If it does so, the USD can be expected to harden again.

China will release its 2017 GDP targets this weekend and those would obviously influence markets as well. Most analysts expect a range of six per cent to 6.5 per cent GDP — lower than the 2016 range of 6.5 to seven per cent. Given total debt at over 250 per cent of GDP, the People’s Bank of China has been tightening up and a lower GDP target would be consistent with its policy.

European sentiment is hard to read. The elections in Holland and France could turn into major gains for right-wing isolationists. Even Germany might see a change in political order if there’s an anti-incumbency vote. Meanwhile, there is the promise of some growth, and some inflation but German bonds are trading with deep negative yields. Britain is lurching through its Brexit manoeuvres with attendant complications.

The Indian GDP estimates suggest that Q3 growth was at seven per cent with the full-year estimate held at 7.1 per cent. Private consumption (Private Final Consumption Expenditure) is said to have grown at above 10 per cent year-on-year in real terms, and Gross Fixed Capital Formation grew at 3.5 per cent year-on-year after contractions in the three previous quarters. Manufacturing is said to have grown at 8.3 per cent.

One possible explanation is that some “informal” consumption (which is normally cash with no taxes paid) was picked up by the formal data. But more or less every high-speed indicator of private consumption was down for that period. Car and two-wheeler sales were impacted; FMCG sales were flat; retail loans were flat. 

Manufacturing indicators such as the Purchasing Managers’ Index and the Index of Industrial Production were negative for December. Bank credit to industry actually contracted in December. Credit growth is at just about five per cent for the quarter, which was the lowest growth rate ever. Bank credit has dropped even lower in the current quarter. Exports contracted. There were widespread lay-offs and benching and none of this gels with the GDP manufacturing data.

However, tax collections are up considerably across April 2016-January 2017. The growth in Gross Value Added (GVA strips off indirect taxes and subsidies from GDP) was around 6.6 per cent year-on-year, which is considerably lower than the 7.8 per cent growth in GVA registered last fiscal. Looking deeper, GDP estimates for Q3, 2015-16 were revised down sharply to create a lower base. If we take the prior Q3, 2015-16 estimates, then the Q3 2016-17 would have seen GDP growth down to about 6.2 per cent year-on-year, which is closer to the consensus estimates. 

It’s likely that the Q3 2016-17 estimates will also be revised down over the next year, in an understated way. There are other weird statistical effects in that the expenditure estimate for GDP exceeds the production estimate. It is usually the other way round because data on the expenditure side comes with a lag.

Incidentally, the revision means that GDP growth estimates for 2015-16 drops. Another little data point suggests that the fiscal deficit may come in higher for 2016-17. The April-January Fisc is at 105 per cent of the annual target, with two months to go. A further pick-up in tax collections may help restore the balance.

Data in the current quarter has been conflicting. There are fears that specific links in the value chain, which were impacted by demonetisation, have not yet recovered. Cement despatches dropped in January, suggesting no pickup in construction. Railway freight carriage is lower for the period April-January. Bank credit growth has eased down to new lows. However, auto sales (at dealer levels) show some recovery. Two-wheeler purchases are still down but four-wheelers are up, and so are tractors.

The equity markets have hit new 52-week highs. Bond yields are inching up towards the seven per cent level again.  The BILT default has hit debt investors in Taurus. Sentiment is, to some extent at least, being driven by hopes of a Bharatiya Janata Party victory in Uttar Pradesh after a good showing in the Maharashtra municipal elections. There are hopes that the GST will finally be implemented. Institutional attitude is interesting. Foreign institutional investor buying was substantial in February but domestic institutions sold significantly in the second half of February. Technically, the trend continues to look bullish but momentum has been lost in the last couple of sessions.