Even the finest embellishers of economic data cannot hide the fact that the Modi government's final lap has not started on a good note. Why else would a reform-oriented, feel-good government highlight the debatable deliverance of subsidy-driven schemes at the end of four years in power, and not economic growth, the biggest indicator of development? Sadly, economic growth has hit its lowest in four years despite the change in GDP series.
In fact, the euphoria around government spending wilted and low-base induced spurt in GDP in the last few quarters of FY18 was balanced out by a first interest rate hike in four years on the back of rising oil prices and looming inflation. India's lowest growth since 2014 is particularly worrying because the economy has to deal with the headwinds of vicious high inflation, interest rates and fiscal deficits ahead of demand and investment revival.
It rains numbers when a financial year bids adieu. From corporate to economy, a barrage of data has come amid government's four-year anniversary blitz. While the gusty monsoon of data sweeps in, we must take a note of a couple of extremely important data sets that will set the tone of Indian economy in FY19, the year of mega election.
Flashing numbers: Barrage of data has come amid government's four-year anniversary blitz.
Punch of penny-pinching
Macro-economically speaking, there was no need in 2013-14 for the Indian government to expand subsidy schemes. The Modi government had inherited an economy with sliding private consumption and investment coupled with reform fatigue and unstable global environment. If one has to look for a single prominent factor which has overwhelmingly driven the economy in the last decades, it is consumption expenditure, that is, spending by billions of Indians. Final consumption expenditure accounted for 65 per cent of the increase in GDP between 2011-12 and 2017-18.
While GDP numbers of March quarter of FY 18 suggest that India is possibly the world’s fastest-growing economy, a close look at the numbers tells us a completely different story. Despite a lower base, private spending failed to record any growth and grew at 6.6 per cent in both Q1FY18 and Q2FY18. Further, it decelerated to 5.6 per cent in Q3FY18 when GDP rose to 7 per cent, and now it has dropped to 2.7 per cent where India has recorded 7.7 per cent growth rate.
The data set for April, that is, the first month of FY19 also corroborates the continuance of shrinkage in private consumption. Preliminary estimates reveal that India’s economic activity grew 6.3 per cent YoY in April 2018, the slowest growth in six months. A look at key drivers confirms that the weakest consumption growth in eight months was almost entirely driven by a 17 per cent decline in fiscal spending as other components grew decently. This is an indicator of rising fiscal constraints which may result in lesser government spending in coming months unlike the January to March FY18.
Back-breaking? Why did the RBI go for an earlier than expected rate hike? The answer lies behind inflation concerns.
The private consumption growth is also at odds with RBI's Consumer Confidence Survey. The current situation index slid down by one point into the pessimistic zone, while the future expectations index showed a marginal uptick. An interest rate hike, will moderate the consumption growth going forward.
Consumption squeeze rhymes with corporate numbers. Corporate performance registered another disappointing quarter (Q4FY18) in general, with profits contracting 19 per cent YoY, while corporate banks and commodities, both were a big disappointment. Even if you exclude it, profit growth still remained muted at 8 per cent versus 10 per cent in Q3FY18 despite a low base. Going into FY19, sustenance of demand recovery, input prices and interest rates will be some of the key variables.
Sliding demand is the reason why the RBI preferred a conservative real GDP growth projection at 7.4 per cent in 2018-19 along with economy staring at cost push pressures due to high crude oil prices.
Hawks are back
Why did the RBI go for an earlier than expected rate hike? The answer lies behind inflation concerns. Although headline inflation has trended down from the start of 2018, core inflation has increased from 5.1 per cent to 5.7 per cent, and any uptick in food and fuel components can disproportionately blow up headline consumer inflation. To build a safeguard against it and to provide some support to weakening rupee, RBI is expected to go for at least two more rate hikes by the end of this financial year.
Theoretically, when central bank commits to keep real rates higher, either through immediate action or with a hike over the near term, it has a positive impact on the currency. The only macro silver-lining is that the RBI's rate hike should support rupee in gaining strength against peers.
A strong rupee against dollar could offer some relief to fuel import bill. This could also keep a check on inflation if the MSP policy doesn’t end up being more inflationary than expected.
Return of the vicious cycle
The Indian economy has been trudging along on feeble private consumption and government expenditure since 2013. Until now, both consumption and government expenditure have been somehow supported by the fall in crude oil prices, lower inflation and interest rates. The government utilised the bounty from falling crude oil prices by increasing taxes and funnelling it into Pay Commission and funds transfers to the states. As the crude cycle has turned, we are starting to see the proportion of capital expenditure falling while private consumption may shrink further in coming months.
In an integrated world, economies rarely enjoy long spells of pleasant weather. The Indian economy, in its post-reform journey, probably had the best four years of virtuous cycle of sound macros and external stability. The NDA government could have easily pushed India's growth to more than 8 per cent by adding minimum 2 per cent to 3 per cent additional growth over and above the 6.5 per cent-7 per cent with the help of external comfort (oil-rupee-doller rate), and BJP governments across most states.
Now, since the vicious cycle of high inflation, expensive fuel, pricey loans and high deficits are back, a growth rate in the lower range of 7 per cent could become India’s new normal in the medium term.