India’s GDP growth had slowed to 5.7 percent in Q1, as demonetisation and the new goods and services tax (GST) seems to have impacted economic activities and demand in the economy.
The Reserve Bank of India (RBI) also in its October Bi-Monthly monetary policy had revised downwards growth projections for FY18 from 7.3 percent to 6.7 percent, which prompted discussions around the merits and demerits of the recent policy announcements.
However, the latest economic indicators and the second quarter corporate results are pointing towards green shoots emerging and indicating that the worst is behind us and the economy seems to be in recovery mode.
These could indicate that the sense of gloom which prevailed earlier could soon fade away and boost investor sentiment, and corporate earnings could pick up with buoyancy in demand recovery, even as government plays its role by means of reforms like bank recapitalisation, disinvestment and infrastructure push etc.
Private consumption which had taken some beating post demonetisation and GST has shown a healthy recovery. Auto sales data indicate that a sharp recovery, with two and three-wheeler sales growth at 10 percent and 23 percent respectively in September indicating a pick-up in rural demand.
The trend is also visible in Passenger vehicle and medium & heavy commercial vehicle segments indicating a pick-up in urban and business sentiments.
Early trends of FMCG companies’ results indicate pick- up in consumer demand, with HUL registering a volume growth of 4% last quarter versus flat growth in the previous quarter.
Government focus on rural spending, reasonable increase in MSP and normal monsoons along with seventh pay commission should result in improved consumer demand.
FMCG companies have reduced prices by 4%-8% to pass on GST benefit, which should also add to the consumer demand.
Export numbers are also encouraging with double-digit growth witnessed in the last two months. Global economic recovery has provided a much-needed tailwind to our export sector with capital goods export growth at 42% and pharma & chemical export growth at 25% in September.
Policy initiatives like Make in India, Mudra scheme for funding microenterprise sectors etc. are also playing an important role in giving an impetus to the export sector.
Credit growth is one of the main pillars of any economy and has been languishing for some time due to the twin balance sheet problem India is facing.
India’s bank non-food credit had dipped to multiyear lows of 3.5% in January on the back of subdued demand, low credit appetite of banks grappling with NPA woes and over-leveraged corporates.
While we have witnessed some pick up in bank non-food credit to 7.2% in October, most of the growth is in the retail space with industry credit growth continues to be lackluster.
Credit growth on an overall basis has shown signs of improvement, with the outstanding bank credit, bonds and commercial papers growing at 14.6 percent on an annual basis by end September as against 13.8 percent last year.
The government’s decision to recapitalise PSU banks will provide much-needed capital to the banks, which can be deployed as a credit to productive sectors and enhance their lending capacity to the industry.
This move is expected to enable banks to extend additional INR 6 trillion loans, which can trigger capex revival and job creation.
While policy measures such as demonetization and GST have impacted the growth in the previous quarters, these initiatives have resulted in improved transparency, formalization of the economy and widening of tax base.
All these are expected to result in strong economic growth for a sustainable period. These steps have resulted in the significant foreign flows in the past one year resulting in all-time high foreign exchange reserves.
The government has planned to invest INR 7 trillion over the next 5 years in road sector which is expected to boost growth and employment. ‘Universal Affordable Housing for All’ being implemented will give a big boost to the construction industry.
In summary, with private consumption continuing to be robust, expectations of private capex recovery along with various initiatives of the government, Indian economy is poised for a strong recovery in the coming quarters.