India's Q2 #GDP beats estimate at 7.6%, driven by manufacturing and the government's spending push ahead of elections.
In conversation with Independent Economist Saugata Bhattacharya. #BQLive
In conversation with Independent Economist Saugata Bhattacharya. #BQLive
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00:00 Hello and welcome. We're in conversation with Shogata Bhattacharya, Independent Economist,
00:05 who's going to help us unpack the GDP data that came out yesterday. GDP growth came in at 7.6%.
00:14 And while that's a tad bit lower than the figures we saw in Q1, it's substantially higher than
00:22 expectations. So we're going to try and look beyond the obvious and try and unpack some trends
00:28 with Mr. Shogata's help. So thank you so very much for taking time out for us today.
00:33 My pleasure, as always.
00:36 So, you know, to begin with, what did you take away from yesterday's figures?
00:40 So one, it was definitely a pleasant surprise. We were initially at the higher end of the
00:48 forecast scale. The consensus was about 6.8. We were at about 7.1. But even this,
00:56 the actual growth outpaced us by at least 50 basis points. So it was a pleasant surprise.
01:02 And now, where did we go wrong is the question that we are asking. So one part is, there's
01:09 definitely some base effects of various higher and lower growth in Q2 of last year, FY23. But
01:16 the pace, the momentum of growth is definitely much higher than we had expected. So that is
01:22 given. The stars of the growth rate was one was manufacturing, and the second was construction.
01:29 So these two outperformed 13.9% and 13% for both. So one, my hypothesis is for manufacturing.
01:39 One is, I think it was a buildup of inventories preparing for the festive season,
01:48 particularly in the month of September, that we have seen in the IAP numbers as well.
01:52 Second was manufacturing, the way GDP is calculated. They also look at the financial
01:59 results of manufacturing companies, services companies, etc. that goes into the GDP.
02:04 So because of lower input costs and because of higher profits, which is a component of the value
02:10 added of GDP, that also pushed up manufacturing. And this is something that we have seen even in
02:16 the import data that we have, the buildup of inventories, that the inventory buildup,
02:22 there were a lot of imports of electronic items, intermediates, etc. I'm sure that was preparing
02:27 for the festive season sales. Together with this, so that's the broad area. The second part is
02:34 consumption still remained weak, 3.1%. This entire higher growth was driven very, very largely
02:42 by investment, by CapEx, which is a very good sign. Now, we don't really know how much of this
02:47 is private sector CapEx, my own sense is a large part of the investments, that was actually
02:52 government, was government investment, which we know has been very, very high, both from the
02:56 center as well as the states. So that also is another feature of this growth. So I think that's
03:02 the whole part. The agricultural part was a little bit of a disappointment, but we had expected that
03:08 because of the low of the problems with the disruptions, the lower than the very bad spatial
03:14 and temporal distribution of the monsoons, etc. We had expected, we had actually forecast a negative
03:19 agricultural growth. But that is one area, I think that remains a concern going forward into
03:25 the rest of the year. Okay, so you know, taking that forward, you've mentioned that manufacturing
03:33 did surprise on the upside. There have been a couple of reports that also suggest that there
03:39 has been a little bit of an exaggeration in the figures we saw for manufacturing yesterday,
03:45 because of the single deflation methodology and the fact that WPI was negative almost through the
03:54 quarter. So I mean, what's your reading on that? Do you think we will see a little bit
03:58 of a downward revision maybe going forward? Not really. I mean, it's perfectly possible
04:04 that there's a small revision downwards, but it is exactly this negative GDP,
04:09 there's negative deflator, the WPI, which has been the cause of this high manufacturing growth,
04:15 because remember that GDP as a whole, typically it's deflated about 40% by the WPI, 30% by the
04:23 CPI and the rest are volume indicators. Manufacturing is almost entirely WPI deflated.
04:29 Now WPI in this quarter was negative. So if you actually the higher the deflator, if WPI had been
04:36 higher, because of the because remember that we are starting from nominal growth, the financial
04:41 results of corporates, and that is deflated by the WPI deflator. So if the WPI number had been higher,
04:48 your real manufacturing growth would have been lower. It's precisely because of this negative
04:53 WPI that you actually inflated the real manufacturing growth. And on top of that,
04:59 the numbers that you've seen, even from the financial results of about, oh, what,
05:04 1600 odd manufacturing companies that we have seen in Q2, even that showed that probably although net
05:12 sales were relatively muted, precisely because of the effect of the lower prices, your profits,
05:18 because of the higher of the lower input costs, and whatever other deflators, other factors there
05:25 were, profit growth for the manufacturing segments was actually pretty high, more than 16%.
05:30 So the two together, the higher volume indicator coming in from the higher numbers,
05:35 the core sector numbers, etc. And the higher profit growth that we've seen from the
05:42 corporate results of the manufacturing sector, these are the two segments, these are the two
05:46 factors, the inputs that actually contributed to the 13.9% manufacturing growth. So I don't
05:52 think it is too much of an exaggeration. Of course, you have to be very clear that there is also a base
05:57 effect of manufacturing because manufacturing last, the same quarter of the last year was minus 4%.
06:03 So that did give a boost. But together with this, I think the momentum of the manufacturing segment
06:09 in this quarter remained fairly robust. Got it. Could you also explain to our viewers,
06:17 you know, the single deflation methodology? And the reason I'm saying that is the past few quarters,
06:22 that's sort of been something that economists have debated about whether that is even the most
06:29 accurate measure that can be used. So what's your take on that entire discussion?
06:36 So I mean, you summarise this very well. Let me try to add to your summary, I think you've brought
06:41 the issue out very well. The single and the double deflator methods are, we use the single deflator.
06:47 So there is only one WPI, which deflates the entire output. The debate in national accounting
06:54 methodology, etc, is whether there should be a double deflator in the sense that the total profits
07:00 very broadly are output minus input, whatever you sell minus your raw material and other costs.
07:06 Right? I mean, that's the normal, the definition of profit. A school of thought says that the double
07:13 deflator method means the output number should be deflated by probably say the CPI and the input
07:19 deflator should be deflated by the WPI. That's the core area. There is a point to that. I mean,
07:26 maybe if you use the double deflator method, there might be a possibility that this number
07:32 would come down. But remember that even in the final output, there are a whole bunch of input
07:38 related, intermediate related. It's not the final FMCG and consumer durables. These are the only
07:44 two segments in the consumer non-durables and the consumer durables that have consumer facing,
07:49 at on which the CPI would be more relevant and appropriate. The other segments, capital goods,
07:55 intermediate goods, basic goods, primary goods, all of that, the WPI would still be a predominant
08:01 deflator. The deflator that would be used for those segments would still be the WPI.
08:05 So, I don't think there is a terrible distortion using the single deflator method.
08:10 Got it. All right. You also touched upon consumption. There does seem to be a little
08:18 bit of concern, especially given that yesterday's data did seem to reinforce that there is a
08:24 difference between urban and rural consumption trends. For instance, agri-GVA, not entirely
08:31 unexpected, did see a little bit of a slowdown because of the impact of the southwest monsoons,
08:38 the volatility that we saw. So far, even rural high frequency indicators have continued to show
08:46 very mixed trends. So, going forward, how are you looking at this?
08:50 So, you're absolutely right that the rural segment, and remember that the rural segment
08:57 in agriculture is only half of the rural segment. There is a non-agricultural, non-farm segment,
09:02 which is probably another half of the rural economy. You're absolutely right that the lower
09:08 farm GDP, agricultural GDP, was potentially a cause for the low consumption. There is no doubt
09:14 about that, particularly in Q2, in the last quarter that we have seen. Rural demand remained
09:20 relatively weak from whatever numbers, I mean, tractor sales, two-wheeler sales, etc., have not
09:27 been very strong. So, it is completely true that that low 3.1% consumption growth numbers,
09:33 private consumption growth numbers, is probably largely led by a slow rural economy.
09:42 Going forward, I think things are looking a little better. In Q3, the numbers, the two-wheeler sales
09:48 numbers, etc., that we have seen, seems to suggest that there is a slight, that the rural economy
09:55 demand has bottomed out, maybe rising gradually, maybe improving gradually. I do hope that this
10:02 actually rises in the second half, Q3 and Q4. Signs are a little, the early signals are a little
10:09 disappointing. Rabi sowing, the reservoir levels, etc., are relatively lower than what we have seen
10:16 in the past. So, we do need to think a little bit. But I'm positive that from the government
10:23 side, the government is spending a lot, the capex spends in the rural economy, on roads, on housing,
10:29 on irrigation projects, etc., both from the center as from the states, look to be a little better,
10:36 a whole lot better. So, maybe that will provide some additional income, additional demand from
10:41 the rural segment. But this is one area you're completely right, bears watching, bears monitoring
10:46 very closely. Okay. So, nominal GDP has come in at 9.1%. How are you looking at that figure?
10:56 The budget did factor in a slightly higher figure, right, for the full year?
11:04 Absolutely. The budget number for the nominal growth that was assumed in the FY24 budget was
11:09 about 10.5%, 10.5 to 11%. So, the number that we have seen is 9.1. And the 9.1, as we discussed
11:16 earlier, is precisely because of the negative WPI that we have seen so far. Going forward,
11:23 we do expect the WPI number to rise and to get into the positive territory. That is likely to
11:30 happen. So, that will mitigate a little bit of the lower numbers that we have seen. From a technical
11:37 side, the lower nominal growth will probably offset a little bit of the earlier real growth.
11:47 Remember, the earlier the CPI number is 5.4%. Real GDP growth was assumed to be 6.5%. So, now,
11:55 real growth in this year, we are probably, probably, still fingers crossed, let's see what
12:01 happens in the next two quarters, we will probably see a real GDP growth in FY24, roundabout 6.8%,
12:08 if we are lucky, 6.9%. So, that will offset to a certain extent about the 1.5% lower or maybe 1%
12:18 lower nominal inflation growth that we have seen. So, we should be close to about 10% nominal growth
12:25 as we go into the second half. So, but that is also something that will technically, arithmetically,
12:32 put a little bit of a pressure on the fiscal deficit numbers. But I expect that the fiscal
12:38 numbers will be driven by high tax growth, etc. It will be very, very manageable and the government
12:43 will stick to the 5.9% fiscal deficit. Okay, alright. So, one last question. We've seen a lot
12:51 of tugs and pulls on one side, GDP growth for Q2 has surprised very much on the upside. That's made
13:00 most economists revise their forecast for the full year. However, headwinds to growth remain. We've
13:06 been talking about the impact of tightening monetary conditions, weak external outlook,
13:12 slowing consumption, maybe some concerns on the rural front, all of that. Net-net, what's the
13:19 impact likely to be going forward? So, I think the main risks to India's growth going forward
13:28 are largely from the external side. Agriculture remains a problem, I completely agree with you.
13:34 But other than that, I think the risks that might emanate are largely from the external side.
13:40 We do expect, the good thing is that I think the rate hike cycles in the G10 central banks,
13:47 the developed markets are mostly done. Markets are now actually pricing in a rate cut somewhere
13:54 in the middle of 2024. So, that is done. So, financial conditions probably will not tighten
13:59 too much. The exception is if there is a larger and faster than expected slowdown in the developed
14:06 markets, that might create volatility in financial markets, and which is bad because that will lead
14:13 to pressure on the Indian rupee and will further complicate India's RBI's monetary policy actions,
14:20 etc. So, we need to be very careful in keeping track of what happens in the external sector.
14:26 My own senses and the worst possible case, the US will probably get into a slight, shallow, short
14:34 recession, maybe, not very much. US economy still remains very, very strong. But the external sector
14:41 more than anything else, I think needs to bear monitor. Okay. But yesterday's figures don't
14:48 change much for the RBI as we're looking at the next monetary policy committee meet on the 8th of
14:53 December. Does it? No, not at all. Because remember, RBI is concerned on whether this high growth
15:00 number feeds into core inflation, that gets mitigated because of the slow, of the low
15:06 personal consumption, private consumption expenditure, 3.1. That shows the demand is
15:11 still not as robust. Whatever growth we have seen is largely one from government spends,
15:16 two from investment. Investment spends are very good because this is actually building up the
15:20 productive capacity of the economy. I mean, that will at some point in time, increase efficiencies
15:25 in the system and probably result, be the fundamental of falling inflation. Got it.
15:32 This was most insightful. Thank you so much for taking time out for us today. My pleasure. Thank
15:36 you so much.
15:46 [BLANK_AUDIO]