The second quarter of a financial year generally tends to be a relatively stable period. The reason is that this is the pre-harvest time, and while there is some kharif output like soybean that enters the market towards the end of September, it is limited. Similarly, there is only some residual rabi crop from the previous quarter that could come into the market. The same story holds for industry which witnesses demand post the kharif harvest which is also the festival season when spending picks up.
As almost all the festivals have been pushed this year, the bulk of the spending effect would be felt in the third quarter. Though, possibly companies would have prepared (pre-stocked perhaps) for the season in September. However, not withstanding that, this time could be a bit different.
There has been a build-up of optimism from August onwards with companies preparing well in advance for the demand to fructify. There has been a sharp increase in bank credit to the retail segment and the RBI’s concern about unsecured personal loans is also a reflection of households borrowing to meet consumption requirements. Further, the Cricket World Cup cricket has created a buzz in the services sector with travel and tourism getting some boost.
In addition, the remnants of pent-up demand, especially in services, could have had some impact.
So, what are the facts that help to build a view on GDP growth for this quarter? First, the Index of Industrial Production (IIP) growth for the second quarter was 7.4 per cent, up from 1.6 per cent last year — clearly a base effect but will nevertheless add to the GDP growth rate. Further, high growth rates in steel and cement — 11.9 per cent and 7.3 per cent respectively (over low base years) — will certainly provide a boost to the construction segment. The growth of 10.6 per cent in GST collections in the second quarter will be reflected in the services component (trade in particular).
Quarterly growth in credit and deposits was 17.6 per cent and 12.3 per cent respectively. This means that the financial services industry too will register impressive growth rates. The accounts of the government till September show that total expenditure, as well as revenue expenditure, was steady and at a slightly higher proportion of the total budget compared with last year.
Lastly, the corporate results for the quarter show depressed growth in sales, but impressive growth in profits. As value added is defined as the sum of gross profit plus salaries, growth will be high.
Corporate profits become vital when value added is reckoned for various sectors, including manufacturing. All these mean that the indicators, used to calculate GDP, point to an upward trend with certain statistical base advantages supporting growth rates. The RBI had projected growth at 6.5 per cent for this quarter, but back-of-the-envelope calculations show that it could be slightly lower at 6.2-6.4 per cent. But this still puts the economy on a firm footing. The annual growth could range between 6.3-6.5 per cent.
An interesting development this year is that the nominal GDP growth could be closer to the real GDP number. This is because most of the price deflators that are used for calculating real GDP are based on the WPI (wholesale price index). WPI inflation for the quarter was -0.65 per cent.
Hence, this quarter may well be like the first quarter when real GDP growth was 7.8 per cent but nominal GDP growth was only marginally higher at 8 per cent. In fact, given that the WPI inflation number has tended to be negative for several months and may remain so in the next few months, the same trend will persist for the entire year.
However, if growth in nominal GDP is slow, the time taken to reach any target — $4 or $ 5 trillion economy — will be that much longer. It can nonetheless be said with confidence that the second quarter will be a consolidation quarter. For the months and quarters thereafter, there are many imponderables.
For one, rural demand. The news of a less-than-normal kharif output this time with rice, pulses and oilseeds being lower than last year means that the rural demand could be less impressive than expected. This segment has been the Achilles’ heel for quite some time. Corporate commentary for the second quarter also indicates weak rural demand even as hopes for a a strong revival in this segment remain.
Second, the drivers of higher consumer spending during second quarter could slow down in the second half of the year as inflation, especially food inflation, has been high. This can or could have put some brakes on spending. Companies have opined that premium products across auto and consumer segments — both durable and FMCG — have done well, while inflation has hit the mass products. Higher inflation comes in the way of demand. Last year, households compromised on savings (which comes out in RBI data on financial savings of households) to meet their pent-up demand. This may not be repeated. There are, however, mixed reports so far with online sales being reported as being buoyant though physical sales have been less impressive.
Third, there is the not-so-good news on investment by the private sector. The government has been on target when it comes to its capex, but there needs to be momentum in spending from the private sector. Up to September, new investment announcements as per CMIE were lower than last year at Rs 8.26 lakh crore. Interestingly Rs 4.74 lakh crore came from the transport sector.
Therefore, the impression one gets is that private investment is cautious. While the overall capacity utilisation rate as per the RBI was 73.6 per cent in June, there is spare capacity which comes in the way of fresh investment. Further, in a pre-election year, companies prefer to wait and watch and hence there can be a pick-up next year after a new government comes to power and announces its policy framework.
How this plays out will determine whether the GDP growth for the year will exceed the 6.3-6.5 per cent forecast for the year. While this does imply slower growth from last year, this is a healthy performance, and sets the base for targeting higher growth next year.
Sabnavis is chief economist, Bank of Baroda and author of Corporate Quirks: The Darker Side of the Sun. Views are personal
It shows a healthy performance, and sets the base for targeting higher growth next year
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22.11.2023
The second quarter of a financial year generally tends to be a relatively stable period. The reason is that this is the pre-harvest time, and while there is some kharif output like soybean that enters the market towards the end of September, it is limited. Similarly, there is only some residual rabi crop from the previous quarter that could come into the market. The same story holds for industry which witnesses demand post the kharif harvest which is also the festival season when spending picks up.
As almost all the festivals have been pushed this year, the bulk of the spending effect would be felt in the third quarter. Though, possibly companies would have prepared (pre-stocked perhaps) for the season in September. However, not withstanding that, this time could be a bit different.
There has been a build-up of optimism from August onwards with companies preparing well in advance for the demand to fructify. There has been a sharp increase in bank credit to the retail segment and the RBI’s concern about unsecured personal loans is also a reflection of households borrowing to meet consumption requirements. Further, the Cricket World Cup cricket has created a buzz in the services sector with travel and tourism getting some boost.
In addition, the remnants of pent-up demand, especially in services, could have had some impact.
So, what are the facts that help to build a view on GDP growth for this quarter? First, the Index of Industrial Production (IIP) growth for the second quarter was 7.4 per cent, up from 1.6 per cent last year — clearly a base effect but will........
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