Economy on revival mode amid sprouts of green shoots in many sectors; all eyes on FY18 GDP estimates on Friday

How do you spot an economic revival? The earliest signs are visible on the highways. Are there more lorries on expressways ferrying goods across states? Latest data show truck sales grew at a robust pace in December, a sign that transport companies are buying more vehicles to rapidly move goods to meet growing consumer demand.

Sample this.

Homegrown auto major Tata Motors sold 40,447 units of commercial vehicles in December, up 62 percent year ago, while the truck segment sales witnessed a massive 83 percent year-on-year growth in December, at 15,828 units, due to an uptick in demand. Similarly, Ashok Leyland sold 19,253 units of medium and heavy, as well as light commercial vehicles in the month of December, up 79 percent from a year ago.

Goods are flying off faster from shop shelves. Companies are showing signs of adding extra capacity lines to meet extra consumer demand. Hiring appears to have picked pace. Key intermediate products such as steel and cement production has scaled multi-year growth highs.

Data released by ministry of commerce showed that eight core industries including cement, steel and refinery products witnessed a 13-month high of 6.8 percent in November from 5 percent a month ago.

Steel output grew 16.6 percent in November from 8.4 percent in October, indicating improvement in construction, automobile and capital goods sectors, while cement production surged 17.3 percent from a contraction of (-) 1.3 percent in October led by anticipated demand and pick in the construction sector as highway building gathered pace.

A string of data in the new year show signs of an economy-wide revival. The manufacturing sector recorded his strongest show in five years. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose to 54.7 in December from 52.6 in November. A higher reading in the index, above 50 indicates expansion, while one below it signals contraction.

The uptick was aided by the sharpest increase in output and new orders since December 2012 and October 2016 respectively. In addition, due to new businesses, jobs creation was the fastest in over five years.

Country’s largest car maker, Maruti Suzuki India witnessed strong sales in December, with its total domestic sales gowing 12.1 percent to 1,19,286 units, led by higher demand in utility vehicles such as Ertiga, Vitara Brezza, S Cross and compact passenger cars including Swift, Baleno, among others.

Has the Indian economy, therefore, turned the corner after four quarters of crippling deceleration? Has the economy finally recovered from the twin blow of demonetisation and the Goods and Services Tax (GST)?

All eyes will be on the government’s first advanced Gross Domestic Product (GDP) estimates for the current financial year that will be released by the Central Statistics Office (CSO) on Friday. The estimate is crucial as the finance ministry prepares Budget projections for the next financial year based on the statistics office data for 2017-18.

The GDP estimate will be compiled using various indicators such as factory output and government’s expenditure in the last seven months, financial performance of companies listed on domestic bourses during April-September, and the first advance estimate of crop production.

GDP growth grew at 6.3 percent in quarter-ended September, higher than a 13 quarter low of April-June’s 5.7 percent. India witnessed one of the biggest one-off sale season ahead of the rollout of Goods and Services Tax (GST) from July 1. A mid-year switchover to GST prompted anxious shops and companies to de-stock and clear up the inventory pile ahead of the new system’s kick off.

Companies had significantly cut back production in June as part of a business strategy to carry over as little old stock as possible into July. Nobody was quite sure whether prices will rise, fall or remain the same after GST, which partly explains the jostle to drain out old stocks at heavy price markdowns.

The scale down in production could had a bearing on the overall GDP growth numbers, pulling it down to a 13-quarter low of 5.7 percent in the quarter-ended June.

Aashna Dodhia, Economist at IHS Markit said that the manufacturing sector continues to face some turbulence as delayed customer payments contributed to greater volumes of outstanding work.

“On the price front, July’s GST continued to lead to greater raw material costs, with input cost inflation accelerating to the sharpest since April. As consumer spending recuperates, firms were restricted in their ability to pass on higher cost burdens to clients, which further placed upward pressure on firms’ margins,” Dodhia said.

According to Care Ratings, their projection for GDP growth for 2017-18 is 6.7-6.8 percent, based on the assumption of significant acceleration in October-December and in quarter-ended March.

“For the first half of the year, growth has come in lower at 6 percent compared with 7.7 percent in April-September, 2016-17. There was only one sector, trade, transport, hotels etc, which registered higher growth in April-September, 2017-18 at 10.5 percent compared with 8.3 percent last year. Further only three other sectors witnessed growth of above 5 percent during this period: public administration etc., electricity and finance, real estate etc. Our,” Care Ratings said.

The Reserve Bank of India (RBI) has retained India’s growth projection at 6.7 percent during 2017-18.

India’s GDP growth witnessed a downtrend since January-March, 2016-17 as it grew at 6.1 percent in that quarter, owing to the sudden flush out of high-value notes and restricted cash access that caused on household spending and corporate investment.

The economy, however, appeared to have weathered out the transitional disruptions caused by GST. GDP grew 6.3 percent in July-September, recovering from a three-year low growth slump of 5.7 percent in April-June, as companies scaled up production and restocked supplies after goods and services tax (GST) kicked in from July 1.

Gross value added (GVA), which is GDP minus taxes, grew 6.1 percent in July-September, mirroring greater production activity in factories. GVA growth had significantly fallen in the last few quarters, slipping to 5.6 percent in April-June.

That said, the RBI’s consumer confidence survey, released in December, shows that it may still take a while for consumer spending to gather pace and push growth in the broader economy.

The consumer confidence index comprises key variables such as economic situation, income, spending, employment and price level.

According to the survey, households’ current perceptions on the general economic situation deteriorated further into the pessimistic zone. The employment situation continued to be a major concern of the respondents for the survey, with current sentiment plummeting further, along with continued weakening of the outlook.

“Sentiments on income dipped further into the pessimistic zone as an increased number of respondents perceived their income declining during the last one year; their outlook on income were also downbeat, underpinned by feeble sentiments on employment,” according to the survey.

The corporate sector, however, was more bullish in its outlook about the Indian economy.

According to the apex bank’s industrial outlook survey of the manufacturing sector, the outlook for demand parameters for the quarter ended December improved across parameters. However, availability of finance may deteriorate further.

“The outlook on cost of raw materials and cost of finance for October-December improved but manufacturing sector may continue to lose pricing power resulting into low profit margin,” it said.