Indian economy in troubled waters

by Manasi Swamy

India’s September quarter GDP growth print came in at 4.55 per cent. The growth dropped to its lowest in the last six-and-a-half years, and also marked the sixth successive quarter of deceleration. The deceleration was along expected lines. A host of fast-frequency indicators were already hinting at worsening of the slowdown in the September quarter.

The GDP data reveals that the main drag on the economy’s growth during the September quarter was weak investment demand. Gross Capital Formation (GCF) remained almost flat compared to the year-ago level. Investment in buildings and machinery, measured by Gross Fixed Capital Formation (GFCF), grew y-o-y by a meagre one per cent, while investments in valuables declined by 11.1 per cent. Of this, the fall in valuables could be an underestimate given that volumes of gold imports slumped y-o-y by 65 per cent in the September 2019 quarter, as per the data released by the Directorate General of Commercial Intelligence & Statistics (DGCI&S).

The government tried providing a push to the economy by stepping up its expenditure by 15.6 per cent during July-September 2019. But, its scale was not enough to stop the deceleration.

Export demand for Indian goods and services shrank for the first time since March 2016.

Domestic consumption demand, on the other hand, showed an improvement in the September 2019 quarter. Y-o-Y growth in Private Final Consumption Expenditure (PFCE) improved to 5.1 per cent from an 18-quarter low of 3.1 per cent during April-June 2019. Moreover, the growth came on a strong base of 9.8 per cent in the September 2018 quarter.

This is a curious case of consumption demand pick-up when all other indicators reflect a slowdown. Apart from the weakness seen in performance of alternate fast-frequency indicators, the GDP data itself showed a 1.1 per cent contraction in gross value added of the manufacturing sector in the September 2019 quarter. The growth in electricity, gas & water supply, at 3.3 per cent, was at its lowest since June 2015. Growth in trade, hotels, transport & communication too was at a six-year low of 4.8 per cent.

There are two small explanations. None of them explain the rise in PFCE adequately. Nevertheless, they could provide at least a partial explanation. For the rest, the rise in PFCE is inexplicable.

  1. Shift in the festive season:

    In 2019, the festive season moved up a bit and therefore a little more into the September quarter. Indian festival season begins in Ganesh Chathurthi and ends with Diwali. This is a season of about 58 days. In 2018, the second quarter got 17 days of the festival season as Ganesh Chathurthi fell on September 13. In 2019, the second quarter got 29 days of this festive season. But, the twist in this analysis is that an “inauspicious” period of 15 days falls within these 58 days as well. In 2019, these days were entirely in the second quarter while in 2018, they spilled over into the third quarter as well.

  2. Shift in share of organised sector:

    Quarterly GDP estimates of the non-agricultural and non-government services sectors are based to a considerable extent on the quarterly financial statements of listed companies. We understand from public statements made by leaders of fast moving consumer goods that they expanded the distribution network aggressively in rural India to grow their business. It is likely that this push into rural India by large FMCG companies led to a shift in demand from the unorganised sectors to the organised sectors. CSO’s reliance on data of only the organised sector could have taken a growth in market share to be a growth in the market itself.

The recovery in consumption demand growth in the second quarter of 2019-20 is quite fragile and is unlikely to sustain in the third quarter. Farm income in the December 2019 quarter is likely to be hit by crop damage due to unseasonal rains and floods in many states. The kharif 2019 season ended with a 0.1 per cent decline in area sown. However, four per cent of the land under agriculture in 12 flood hit states including Maharashtra, Karnataka, Kerala, Assam, Bihar and Odisha got submerged under water due to heavy downpour in October, as per a news report in Hindu Business Line. These states account for around 70 per cent of the total area sown under kharif crops.

A host of other indicators are also hinting a continuation of the slowdown, and its probable worsening in the third quarter of 2019-20. IHS Markit services PMI contracted for the second consecutive month in October. IHS Markit service PMI though remained in a positive territory, its level at 50.6 in October and 51.2 in November was quite low when compared to the last two-years’ average of 52.4.

Passenger car sales continued to report a y-o-y fall in October and November even on a low base. The two and three-wheeler industry too continued its double-digit sales fall in October and November.

In October 2019, eight core industries marked the second consecutive month of a y-o-y fall in output. Moreover, the magnitude of fall at 5.8 per cent was higher than that in September. Peak demand for electricity and consumption of petroleum products contracted y-o-y by five per cent and 1.5 per cent, respectively, in October.

Among transportation indicators, railway freight traffic tanked by 8.1 per cent in October. Data of port traffic for October has not been released yet. But, a 4.7 per cent contraction in trade of non-POL items (exports plus imports) in October suggests that port traffic growth was either negative or was negligibly positive during the month.

A further deceleration in outstanding non-food credit growth disbursed by scheduled commercial banks (SCBs) to 7.9 per cent in the first week of November from 8.7 per cent at end-September serves as an indication of slowdown in investment demand and overall business activity.

The lower base of last year may help the economy show a marginal statistical improvement in growth to 4.7 per cent in the second quarter of 2019-20. The growth may improve further to around 5.6 per cent in the fourth quarter on a low base. An expected rise in rabi crop and an increase in food prices are also projected to contribute to the fourth quarter growth.

Overall, we expect fiscal year 2019-20 to end with a five per cent growth in real GDP. This will be the lowest growth seen by the economy since 2008-09, the year of Global Liquidity Crisis.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.0 -0.8
Consumer Sentiments Index
Base September-December 2015
59.2 +0.3
Consumer Expectations Index
Base September-December 2015
60.6 +0.5
Current Economic Conditions Index
Base September-December 2015
57.0 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Mar 21 Jun 21 Sep 21 Dec 21
New projects 2.36 2.74 2.25 2.51
Completed projects 1.17 0.74 1.18 1.53
Stalled projects 0.28 0.33 0.03 0.03
Revived projects 0.23 0.12 0.28 0.39
Implementation stalled projects 0.34 0.38 0.25 0.65
Updated on: 19 Jan 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 21 Jun 21 Sep 21 Dec 21
All listed Companies
 Income 15.1 39.2 27.9 17.0
 Expenses 7.4 38.6 27.3 18.0
 Net profit 337.8 142.5 52.7 12.8
 PAT margin (%) 8.8 9.0 9.6 19.4
 Count of Cos. 4,401 4,495 4,546 145
Non-financial Companies
 Income 17.8 56.1 36.1 18.9
 Expenses 10.7 57.1 36.6 22.3
 Net profit 222.4 199.3 59.5 4.9
 PAT margin (%) 9.0 8.5 8.8 17.7
 Net fixed assets 2.3 4.9
 Current assets 4.3 11.0
 Current liabilities 1.2 0.9
 Borrowings -4.5 12.2
 Reserves & surplus 11.7 12.4
 Count of Cos. 3,247 3,301 3,304 104
Numbers are net of P&E
Updated on: 19 Jan 2022 8:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.4 0.6 -1.5
 Expenses 13.8 0.4 -4.1
 Net profit 12.7 -6.9 62.0
 PAT margin (%) 2.0 2.1 5.7
 Assets 9.9 8.8 10.7
 Net worth 8.2 4.5 13.3
 RONW (%) 3.6 3.5 8.2
 Count of Cos. 32,530 31,471 11,634
Non-financial Companies
 Income 14.2 -1.2 -3.0
 Expenses 14.3 -0.9 -5.3
 Net profit 22.1 -21.1 49.3
 PAT margin (%) 2.8 2.3 5.3
 Net fixed assets 6.0 11.2 1.5
 Net worth 7.8 2.2 11.0
 RONW (%) 6.3 4.9 9.1
 Debt / Equity (times) 1.0 1.1 0.8
 Interest cover (times) 2.2 1.9 2.8
 Net working capital cycle (days) 74 81 80
 Count of Cos. 25,943 25,015 8,657
Numbers are net of P&E
Updated on: 18 Jan 2022 2:48PM