GDP Data scheduled to be released today
Growth may have ticked higher in 3QFY16 by 7.6% believes India Ratings and Research (Ind-Ra) compared to 7.4% in 2QFY16. Growth is likely to get support from a favourable base effect, as GDP in 3QFY15 grew by 6.6%. Also, domestic demand witnessed during the festival season is expected to support growth in the 3QFY16, even as global headwinds have had an adverse impact on manufacturing and exports.
Investment activity has been muted due to low capacity utilisation in several manufacturing sectors, highly leveraged balance sheets of infrastructure companies and stretched balance sheets of banks. However, though still insipient, it is slowly picking up. The onus of reviving the investment cycle under such circumstances has therefore fallen on the government, which it did by increasing government capex by INR 700Bn over the FY15RE in the FY16 budget. While revival of the capex cycle will take a while, there is higher hope of a revival in consumption demand, due to falling inflation and monetary easing. Consumer price inflation averaged at 5.3% during the December quarter and the Reserve Bank of India slashed rates by 50bp at the end of September 2015.
Private consumption is likely to drive growth on the expenditure side while services namely trade, hotel, transport, communication, financial services and real estate are the sectors which are likely to drive gross value added (GVA) growth in 3QFY16.
Ind-Ra believes industrial recovery continues to remain fragile. The Index of Industrial Production (IIP) captures the corporate sector manufacturing output and does not take into account the household sector manufacturing output. This has led to some bit of a disconnect between IIP and manufacturing GVA growth. In 1HFY16, manufacturing IIP grew by 4.2% while manufacturing GVA grew by 8.2%. The value added from the household manufacturing sector to overall manufacturing sector was 14% in FY14 and grew by 13.9% during FY12-FY14. In contrast, value added from corporate manufacturing sector grew by an abysmal 4.6% during FY12-FY14. This pulled down total manufacturing sector value added growth to 5.8% during the same time period.
The divergence between output and value added growth gets amplified during the time of declining/falling input prices, which is the present scenario. Another reason for divergence is the different base year used for the calculation of IIP and GVA. Ind-Ra expects 3QFY16 nominal GDP growth to be higher than real GDP growth. This is due to the decline in the wholesale price index based deflation to 2.3% in 3QFY16 from 4.6% deflation in 2QFY16. The sharp increase in wholesale price deflation in 2QFY16 from 1QFY16 was mainly responsible for nominal GDP growth falling below real GDP growth.
(Dr Pant is Chief Economist & Head Public Finance, India Ratings & Research)