Demonetisation and GST have indeed slowed the economy, but industry believes the economy will bounce back in six months.
Those who waited for the GDP numbers will not be surprised. India’s growth slowed down to 5.7 percent during the April-June quarter. The economy slowed down for the second consecutive quarter, after recording 6.1 percent growth during the January-March quarter. The slowdown in growth during the first quarter of fiscal 2017-18 stems from the double whammy of demonetisation and GST rollout on business activities.
While services grew by more than 7 percent during the first quarter, every other industry saw slow growth. However, government spending remained high and propped up the GDP to an extent.
However, the GVA (gross value add) during the June quarter was only 5.6 percent compared to 7.6 percent in June quarter of 2016. GVA in manufacturing fell to 1.2 percent from 10.7 percent in the same quarter last year. This was largely the result of businesses getting rid of their stocks ahead of the July 1 GST rollout. GVA is the total goods and services provided minus cost of inputs and raw materials used in production.
These numbers have become important to track corporate profits over the last few quarters. According to the Centre for Monitoring the Indian Economy, corporate sales rose 10.1 percent in the first quarter of 2017-18. But in the same time frame corporate profits fell by 9.1 percent. It is interesting to note that corporates began to destock and realign their supply chain in the remonetised era.
No wonder the Index of Industrial Production was higher by 2 percent (because of increase in production and sales) for the June quarter 2017 compared to last year.
The RBI data on corporate and household savings as a percentage of the Gross National Disposable Income (GNDI), however, offers a different perspective to the fears of a slowdown. While corporate savings have gone up slightly, which can mean that investments are slowing, household savings have dropped and this signals that people are in debt or have leveraged themselves. Household savings is only 18.7 percent of the GNDI in the June quarter whereas in 2014-15 it was 20 percent.
Is this situation dangerous? This is where the growth in salaries becomes important going forward. If there is a fall in investment from the corporate sector even when consumer sentiment is high, and as a result employment and salaries fall, the leveraged situation can create a slowdown in the economy. Unfortunately, the RBI’s monetary policy is key to growth parameters. Today, interest rates are yet to come down. However, the government has kept the annualised inflation target at 3.78 percent, which means consumption will continue to be high.
“India will have a lot of global investments and consumption will always be high thanks to the domestic economy. The impact of GST and demonetisation will create a long-term transparency in the system,” says Mahesh Lingareddy, Chairman of Smarton.
Growth in GDP signals that investment and production are on the rise along with expenditure. However call it reforms or social engineering, it has slowed down and will be slow for the next few months.
“The industry will realign itself and bounce back in a few months. GST has already increased the tax collected over the previous year and will bring growth back to India,” says K. Ravi, President of the FKCCI.
Now if corporate investment remains tepid and if salaries fall in the coming year, there may be a slowdown even if inflation stays low. The only thing that can provide a stimulus in such a scenario is a fall in interest rates, which looks unlikely considering the RBI does not want banks to be over-leveraged with retail loans, especially at a time when corporate leverage is increasing banks’ non-performing assets.