Narrative has changed since the time the GDP and current account data-points were released for the June quarter. Shocked by the sharp slowdown in growth numbers coupled with surging deficit in current account, business media and policy commentators have started to beam with breathless commentary on how India’s macro has suddenly lost its magic on fallout of demonetization and on poor implementation of GST. Feeling vindicated on their criticism on some of the policy measures of this administration, esp. on DeMon, the mainstream channels have joined the chorus to magnify this quarter muddle into a mega trend of sharper slump. Yes, the GDP growth which came at 5.7% for June quarter was shockingly low and the CAD (current account deficit) at 2.4% belied even the most pessimistic projections. That said, placing the complete onus on some of the transient factors like GST and DeMon, will be akin to missing the woods for the trees.
Closer look at the data points will tell us that the economy has been slipping steadily since March 2016,much before the DeMon struck on 8th Nov’16. As can be seen in the below exhibit, the core GVA (growth measured in Gross Value Added metric excluding agriculture and govt. expenditure) peaked in March’16 quarter at 10%+ and has been sliding since then to sub 5% in March’17 quarter, before marginally recovering to 5%+ level in June quarter. This, seen in the context of structurally falling numbers both in private investment growth and in GFCF i.e. Gross Fixed Capital Formation (as reflected in the charts below), will make one understand that the root of the malaise is not in the transient factors like GST etc, but in the secular slowdown in investment demand. Of course, sharp appreciation in Rupee over past several months in real effective exchange rate basis (ref chart below) has added to the woes. With current account slipping, adjustment is on cards with Rupee beginning to lose its shine and thereby providing much needed relief for the exporters. That leaves us with the bigger challenge which is, how to stem the rot in capex cycle?. Without reviving private capex cycle, it is near impossible for the economy to cross the 7 to 8% hurdle, though it can recover to high 6% when the transient factors fade in couple of quarters. This is because, private capex constitutes over 30%+ of GDP (over $600 Bn) which if remains sluggish, can scuttle the much brandished India Story, leave alone the scary job prospects. Govt’s ill advised plan to splurge on public investment by relaxing fiscal norms (thro fiscal stimulus), can barely move the needle on growth, while could upset the portfolio flows (esp to debt) and hence Rupee, if bond investors start fleeing on the prospect of rising market borrowings (hence Gsec yield). Hope Govt. doesn’t compound its macro problems by yielding to the increased noise on fiscal stimulus.
But reviving investment demand is not going to be easy. Govt. has been struggling with this for last two years. What ails the private capex, is not so much to do with supply of credit than to the demand for credit. Given this, neither the rate-cuts nor the balance sheet cleanups in PSU banks can revive the investments meaningfully, though can help incrementally. Given the surplus liquidity that is sloshing in the global monetary system, capital or the cost of it is the last thing that worries corporate chieftains, though they continue to clamor for rate-cuts as part of their diversionary tactics. India Inc is not investing, not for lack of capital, but because of the gross under-utilization in much of the sectors. High capital intensive sectors such as Energy, Metals, Oil & Gas etc. suffer from serious surplus capacity globally too. Add to this, the surge in buy-out opportunities for the Indian corporates because of balance sheet stress in much of the capital intensive sectors. Why would any corporate invest in green-field projects if ready capacities are available at distressed levels. The solution lies in the consumption demand. Sustained rise in consumption can improve utilization and hence the need for additional capacity which will in turn revive the investments. Greenshoots across global economies of course will help in reducing spare global capacity while strengthening private consumption in India will over time compel chieftains to open their purse strings. Till then, it is going to be sub-7% reality, which the Govt. and investors have to make peace with.