Coface Projects 7.2% Growth For India

Weak Investment Sentiments

India’s real GDP growth year-on-year (Y-o-Y) was +7.1% in Q1 of FY16-17 from +7.9% in Q4 of FY15-16. 

This was below market expectations (+7.6%). Investment declined for the second straight quarter and private consumption growth slowed. Government spending growth surged and exports finally contributed positively to growth, after struggling for the previous five straight quarters. 

The real Gross Value Added (GVA) growth, a better measure of economic activity from a supply perspective, was in line with market expectations at +7.3% Y-o-Y in Q1 of FY16-17, almost unchanged from +7.4% in the previous quarter. The slowdown was nonetheless broad-based, from the agriculture, forestry and fishing sectors to the private services sector, excluding public administration, defence and other services. 

As usual, Coface has been cautious when reading India’s GDP report. From a GDP expenditure approach, India’s real GDP growth, excluding discrepancies, was only +6.2% in Q1 of FY16-17, much lower than suggested by the headline growth of +7.1%. Discrepancies remain large, raising questions about the data quality. 

Growth in the services sector accounted for 54.6% of GVA, mainly driven by the growth acceleration in public services activity (+12.3% in Q1 of FY16-17 vs. +6.4% in Q4 of FY15-16). Growth in private services activity (including trade, hotels, transport, communication & broadcasting, and financial, real estate and professional services) slowed to +8.8% in Q1 of FY16-17 from +9.5% in the previous quarter. 

Industry sector growth accounted for 31.7% of GVA which slowed to +6.0% in Q1 of FY16-17 from +7.9% in the previous quarter, dragged by weaker mining, quarrying and construction activities. Growth in manufacturing activity remained steady (+9.3% in Q1 of FY16-17 vs. +9.1% in Q4 of FY15-16). 

Growth in agriculture, forestry and fishing sector (accounting for 13.7% of GVA) moderated to +1.8% in Q1 of FY16-17 from +2.3% in the previous quarter. 

All in all, the GVA growth could have been lower if government spending growth in Q1 of FY 16-17 had been weaker. India’s real GVA growth, excluding public administration, defence and other services was only +6.7% Y-o-Y in Q1 of FY16-17, slowing from +7.6% in Q4 of FY15-16. 

Risks

Going forward, India’s economy is expected to grow at 7.2% in FY16-17, mainly because private consumption growth is expected to pick up, amid a pay hike for federal employees and a good monsoon that would probably boost rural incomes. That said, there are risks: Investment is likely to remain subdued, mainly because: 

1.     Corporate deleveraging: The proportion of leveraged companies in a sample of 2 600 listed non-government, non-financial companies fell to 14% in March 2016, relative to 19% in September 2015 according to the Reserve Bank of India (RBI)’s financial stability report released in June. 

2.     Banks’ tighter credit controls and slow transmission of policy rate reductions to lending rates: The banking reform requires banks to make full provision for all troubled loans by the end of March 2017, limiting room for banks to lend. 

3.     Sub-par capacity utilisation in manufacturing activity: Capacity utilisation levels were around 70% to 74% for the 900 manufacturing companies surveyed by RBI, suggesting further investment could be put on hold, especially after considering the sluggish global trade activity. 

On the positive side, the Goods and Services Tax (GST) passage in the upper house on 3 August 2016 and the recent appointment of Urjit Patel as the new RBI governor, to serve from September 2016 to 2019, will probably help boost foreign investment sentiments in the medium term. He is expected to keep RBI independent with policy continuity from maintaining its accommodative monetary policy stance following the inflation targeting regime to the continuous effort for the banking reform. 

Government spending is less likely to be a key growth driver in this financial year, as the Indian government spent 73.7% of the budget target for FY16-17 in July.