There are several signs that India′s economy is undergoing a sustainable turnaround that promises to take it to a higher growth trajectory. But there are significant risks, including the possibility of a fickle Monsoon that cannot be wished away.
The rain gods, Indian policy-makers, industrialists and human resource managers seem to be coming together on the same page. The green shoots of growth in India′s economy seem to be pointing towards a sustained recovery after several false dawns and red herrings over the last four years.
In its latest review of the country's monetary policy, the Reserve Bank of India (RBI) predicted a return to high growth rates coupled with moderate inflation rates.
In its first 'Monetary Policy Statement for 2018-19', the six wise men who are part of the
said they expect the Consumer Price Index (CPI), which measures retail inflation, to be in the 4.7-5.1 per cent range in the first half of the new financial year and 4.4 per cent in the second half. The committee also expects India's headline GDP growth rate to rise to 7.4 per cent in 2018-19 from 6.6 per cent the previous year.
RBI's optimism seems to be borne out by data from the eight major infrastructure sectors that make up more than 40 per cent of India's factory output. Their performance is often treated as a proxy for health of the country's industry.
The eight core sectors - cement, steel, electricity,
, refinery products and fertilisers - expanded 5.3 per cent in February, compared to 0.6 per cent in February last year. This surge was led mainly by the good performance of the refinery, fertiliser and cement industries.
The cement sector grew at a steroid-charged 22.9 per cent, signifying a pick-up in construction and real estate sectors across the country. This is significant as these sectors have forward and backward linkages with more than 250 upstream and downstream industries and a rebound in construction activity has a multiplier effect on the entire economy.
The refinery sector also grew at a robust 7.8 per cent in February against a decline of 2.8 per cent in February 2017. A rise in demand for petroleum products, especially diesel, augurs well for the economy as it indicates an increase in transportation activity, critical to keeping the wheels of the economy moving.
Fertiliser output also increased 5.3 per cent during the month under review, indicating that the much reported distress in the farming sector may be easing.
generation also grew at a healthy 4 per cent against 1.2 per cent in the year ago period. This could be due to a rise in factory activity as well as increased demand from first-time consumers who have got connections under the Narendra Modi government's
Scheme, which has promised to provide power to every household in India by the end of the year.
Coal and steel production in February, however, grew at a slower pace than in the same month last year.
In any economy, the sales of passenger vehicles is seen as good indicator of consumer demand while the sales of
is considered a barometer of economic activity and well-being.
The prognosis on both these counts is very positive for the Indian economy. Passenger car sales grew a healthy 9.4 per cent in March 2018, according to figures published in the Indian media.
Market leader Maruti Suzuki sold 147,170 units, a growth of 15.3 per cent over its sales in March 2017. Its sales were boosted by a 21 per cent increase in the sales of its small cars such as Alto and WagonR and a 13.5 per cent rise in the sale of compact cars like Swift, Baleno, Ignis, Celerio, Dzire and Tour S. Maruti Suzuki sales for the entire 2017-18 financial year rose 13.8 per cent to 1.643 million cars.
Motors and Mahindra & Mahindra also grew at healthy rates in March as well as the full year. And two-wheelers have grown an average 25 per cent during the last quarter of 2017-18.
In commercial vehicles, Tata Motors retained its position as market leader, selling 49,174 units in March, a growth of 37 per cent. “The government's push towards infrastructure development, restriction on overloading of trucks, road construction and mining activities boosted demand in the medium and heavy commercial vehicles segment,” Girish Wagh, President of Tata Motors' Commercial Vehicle Business Unit, told the media.
The financial results for the last quarter of 2017-18 as well as the full year are expected to start coming in from the middle of April and most analysts expect companies to post significantly improved results across sectors with the exception of telecom and pharmaceuticals.
This is because demand, which had been tepid for several quarters, has picked up at last, especially in consumer-facing sectors and in rural India.
One report quoted the head of institutional research at a leading financial services company as saying: “The improved demand is seen sustaining, owing to better rural demand and recovery in the global trade scenario. Further evidence of recovery is seen in the recovery of credit demand and higher government spending.
“Growth in non-food credit has recovered to 11 per cent by mid-March 2018 from 5 per cent a year back. The consumer space, including staples and discretionary (like autos) are expected to witness a fairly healthy performance... There also appears to be a modest pick-up in the capital goods sector."
Adds Prasad Koparkar, Senior Director, CRISIL Research: “The second half of fiscal 2018 will end at a double digit mark, mainly led by consumption and commodity linked sectors. Volume growth is clearly evident across consumption linked sectors...”
Credit scenario improving
report on the credit landscape in India points to two distinct trends, both very heartening. While the bad loan crisis has touched 14 per cent of all outstanding loans, the resolution efforts underway will almost certainly lead to an improvement in asset quality on banks' balance sheets.
Even more encouraging is the fact that Crisil upgraded 1,402 companies and downgraded 839 in 2017-18 - reflecting an improvement in the quality of credit.
Then, India Inc raised a record Rs 1.75 lakh crore in equity during the 10 months ended January 31, 2018, indicating that a new cycle of capital expenditure may be underway.
“Crisil-rated companies have shown steady improvement in capital structure and debt protection metrics over the past four years. The median gearing of companies improved to 1.0 time in fiscal 2018 from 1.37 times in fiscal 2015, whereas median interest cover improved to 2.83 times from 2.29 times.
The debt-weighted credit ratio stood at 1.53 times in the second half of fiscal 2018. Credit quality of debt-intensive sectors such as metals (especially nonferrous), mid-sized EPC (engineering, procurement and construction), and select capital goods improved on account of higher commodity prices and government's focus on infrastructure spending, its report said.
The quantum of credit has also picked up in recent months, making analysts optimistic that the economic turnaround will be sustainable.
RBI Governor Urjit Patel said: “This is also reflected in a pick-up in credit offtake in recent months. The large mobilisation of resources from the primary capital market should support investment activity further. While the domestic cyclical recovery is underway, the long-term growth potential is also expected to be reinforced by various structural reforms introduced in the recent past.”
Recovery in jobs, at last
There is good news on the jobs front as well. After trenchant criticism from several quarters over the alleged jobless growth in the Indian economy, the employment sub-index of the Nikkei India Services Purchasing Managers' Index (PMI) for March 2018 touched its highest level of 52.8 since June 2011, i.e. the best performance in terms of employment creation in almost seven years.
Any figure above 50 indicates expansion an any figure below 50 points to a contraction in job creation. The employment sub-index, which started moving up in September 2017, peaked in March. The jury is still out on whether this growth in job creation can be sustained over the long term. That's because increase automation and the adoption of artificial intelligence in several sectors will have a negative impact on the net creation of new jobs in the economy.
However, the impact of the Goods and Services Tax (GST) and the resulting formalisation of the grey economy will lead to the creation of several million new jobs. The precise impact of this development is being closely watched and it will be premature at this stage to draw any conclusions on its impact.
Rain gods expected to smile this year
India's only private weather forecaster Skymet has predicted a normal Monsoon season this year. A caveat will be in order here. India's official weather forecaster, the Indian Meteorological Department (IMD), has not yet come out with its forecast, which is expected in the middle of this month.
Skymet predicted this year's Monsoon to be 100 per cent of the long period average. In India, a Monsoon is considered normal if the rainfall is between 96 per cent and 104 per cent of the long period average, which is around 887 mm for the June-September period, which is the duration of the monsoon.
If this forecast is correct - and many experts have said it is too early to make any definitive prediction at this point - it will augur well for the Indian economy, as 60 per cent of India's farms depend on monsoon rains for water in the absence of irrigation facilities.
“It (the Skymet forecast) is a good initial indicator of Monsoon in 2018 but I feel it to be too preliminary to make any firm prediction on how it will affect the agriculture sector or the economy this year. Also, the distribution of the rainfall holds the key rather than the overall quantum, which we would know only near June and July,” said Madan Sabnavis, Chief Economist at CARE Ratings.
India's rural economy sustains more than 40 per cent of aggregate consumption in the country and accounts for a significant percentage of demand for steel, cement, two-wheelers, tractors, FMCG products, garments and apparel, footwear, televisions, mobile phones and a host of other products and services. So, a poor Monsoon, which leads to rural distress and a drop in rural purchasing power, affects not only the farming community but also the entire economy as well as India's fast growing urban population.
Then, a good Monsoon not only improves the prospects of the
harvest (in summer), it also recharges reservoirs and groundwater sources critical for the
crop (in winter). Almost 70 per cent of India's annual precipitation comes during the Monsoon between June and September.
Incidentally, in the four years of the Modi government, India has experienced two drought years and a year of sub-optimal rains. Thus, only one year, out of the four, has seen normal rainfall. This could be a major reason for the widely reported farm distress in parts of India.
The forecast of a normal Monsoon will bring cheer to policy-makers, businesses and households alike because it promises a bountiful harvest, which will lead to a moderation in food prices and a resulting fall in inflation rate, which, in turn, may prompt the RBI to cut interest rates. Retail food inflation has been falling in recent months and fell to 3.26 per cent in February.
However, it should be noted that the quantum of rain is only one factor in determining whether a Monsoon is normal or not. A more important factor is its distribution, i.e. whether every part of India receives sufficient rainfall. There have been years in which despite total rainfall in the normal range, some parts of India have received deficient rainfall while others have experienced floods.
Significant risks still exist
Despite the confluence of so many positive factors, a lot could still go wrong with the Indian economy and expose it to the risk of a slowdown.
The most significant risk is that of inflation, a point highlighted by RBI's Patel. “The revised formula for MSP as announced in the Union Budget 2018-19 for
crops may have an impact on inflation, although the exact magnitude will be known only in the coming months. Secondly, the staggered impact of HRA revisions by various state governments may push headline inflation up,” he said.
Then, the RBI chief pointed out, inflation outlook could be adversely impacted if there is any fiscal slippage from the Budget Estimates for 2018-19.
“There are also risks to inflation from fiscal slippages at the level of states on account of higher committed revenue expenditure. Should the Monsoon turn deficient temporarily and/or spatially, it may have a significant bearing on food inflation. Firms polled in the RBI's Industrial Outlook Survey expect input and output prices to rise. Recent volatility in crude prices has imparted considerable uncertainty to the near-term outlook,” the RBI Governor said.
If any of these factors come into play and the CPI rises, then the MPC will have no choice but to raise interest rates, and quite possibly, snuff out the turnaround currently underway in the economy.
The Monetary Policy document points to some other risks as well. It says: “The deterioration in public finances risks crowding out private financing and investment. Furthermore, even as global growth and trade have been strengthening, rising trade protectionism and financial market volatility could derail the ongoing global recovery.
“In this unsettling global environment, it is especially important that domestic macroeconomic fundamentals are strengthened, deleveraging of distressed corporates and rebuilding of bank balance sheets persisted with, and the risk-sharing markets deepened.”
Watching the swing carefully
When the Modi government came to power in 2014, the Indian economy was in the doldrums, being bracketed with the Fragile Five, which were expected to collapse anytime. As the Prime Minister himself pointed out early in his term, a terminally ill patient cannot exercise in the hope of regaining his health. Bitter medicines and often painful medical processes are necessary to nurse him back to fitness.
- including the very disruptive but absolutely necessary demonetisation exercise and the launch of GST - later, the economy has once again reached an inflexion point from which it can take off to a higher growth trajectory.
But as pointed out above, there are several issues that could still derail the growth story. Whether the economy finally shakes off the cumulative lethargy of the last few years will depend partially on administrative factors but critically on nature, more specifically, the Monsoon rains.
It will be little wonder if Modi, Jaitley, Indian and foreign industrialists and the entire global investor community have their eyes peeled on the sky from June to September.