GDP growth to stagnate at 6.9% in 2017-18

Growth to hover around 7% in medium-run

by Manasi Swamy

India’s real GDP growth is expected to stagnate at 6.9 per cent in 2017-18, after getting shaved off by one full percentage point in 2016-17.

Private consumption expenditure, which was the driver of growth last year, is expected to witness 37 basis points deceleration in growth to 6.8 per cent in 2017-18. A flattish growth in foodgrain production, after a bumper output in 2016-17, a sharp increase in food prices, minimal increase in wages, slow pace of fresh employment generation and lesser fiscal push from the government is likely to lead to a slow recovery in consumption demand from the shock of demonetisation.

While consumption demand is showing a mild recovery, the official GDP statistics would show a drop in the growth rate of PFCE. This is because the CSO’s methodology of PFCE estimation is flawed. The CSO estimates PFCE from supply-side, with a simple and naive assumption that whatever is produced during a year gets consumed in the same year. Due to this, 2016-17 saw a smart 7.2 per cent growth in consumption expenditure in spite of consumers losing their purchasing power post demonetisation. The year saw a bumper output of foodgrains, which was assumed by the CSO to have been consumed. Hence, the CSO estimated a good growth in PFCE for the year. Besides, the CSO does not have a machinery to collect fast-frequency data from the unorganised sector which bore the maximum brunt of demonetisation.

The factors that overestimated the PFCE growth in 2016-17 are now going to understate the PFCE growth in 2017-18. Thus, consumption demand, which is actually going to show a mild recovery will be seen decelerating in the official national accounts statistics.

The growth in government final expenditure is likely to decelerate and settle in single-digit (9.9 per cent). The growth will fall from its peak of 16.9 per cent in 2016-17, as the government does not have enough fiscal space and more importantly it has shown no inclination to keep pumping money into the economy at the same pace year-after-year. In nominal terms, the government has budgeted for a 6.6 per cent increase in spending for 2017-18, as against a 12.5 per cent increase in 2016-17.

Investment demand, after contracting in 2016-17, is likely to return to growth in 2017-18. The growth rate, however, at 4.9 per cent would be much lower than the decadal average of 6.7 per cent per annum. We believe that the private sector will not take much interest in capacity expansion given the fact that there is ample capacity lying idle in most industries. But, we do expect the government to fast track infrastructural projects and try to complete a few before the next general elections scheduled in 2019.

The medium-run outlook of the Indian economy also looks sedate. The GDP growth is likely to hover around the seven per cent, with no major acceleration expected till 2020-21.

Our projections rest on the following reasons:

  1. The private sector is unlikely to go for aggressive capacity addition till demand shows a sustainable acceleration in growth, capacity utilisation starts rising and returns on investment increase. At present, the capacity utilisation of the Indian industry is quite low. It was as low as 72.4 per cent at the end of September 2016, as per the RBI’s OBICUS survey. Even if no capacity is added, with the existing capacity, the Indian industry has the ability to cater to an 8 per cent annual growth in demand for the next four years ie till 2020-21. It is not only the capacity utilisation, but also the ROCE of the manufacturing sector that has fallen substantially to around 4 per cent from 8-11 per cent during the boom period.
  2. The government does not have the fiscal space to escalate its spending to a level that can provide a big push to the country’s economic growth. It has been spending on infrastructure and will continue to spend at around the same pace.
  3. With global commodity cycle turning around, crude oil prices rising, retail price inflation in India is likely to rise from its current low levels and hover around 5 per cent, if no droughts are witnessed. Imported inflation always mars the growth prospects of an economy.
  4. With slow job creation and steady inflation, there is not much scope for consumption expenditure (in real terms) to show an acceleration in growth.
  5. The economy seems to be settling at low demand for labour and low consumption expenditure equilibrium post demonetisation. And, this vicious cycle is difficult to break. In fact, we do not see any trigger breaking this cycle.

Unemployment Rate
Per cent
6.0 -0.1
Consumer Sentiments Index
Base September-December 2015
93.3 0.0
Consumer Expectations Index
Base September-December 2015
93.3 -0.3
Current Economic Conditions Index
Base September-December 2015
93.2 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 17 Sep 17 Dec 17 Mar 18
New projects 2.33 1.38 1.23 2.16
Completed projects 0.87 1.21 1.02 1.07
Stalled projects 2.67 0.69 0.93 3.34
Revived projects 0.23 0.34 0.23 0.14
Implementation stalled projects 0.73 0.73 0.58 1.05
Updated on: 27 Apr 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Jun 17 Sep 17 Dec 17 Mar 18
All listed Companies
 Income 9.6 7.9 11.9 9.6
 Expenses 9.9 9.0 12.9 13.1
 Net profit -19.9 -18.1 -13.9 -12.1
 PAT margin (%) 5.3 5.5 4.9 11.2
 Count of Cos. 4,483 4,470 4,433 119
Non-financial Companies
 Income 10.2 8.2 13.2 6.6
 Expenses 10.5 8.2 12.3 7.9
 Net profit -25.1 -6.0 12.7 -1.1
 PAT margin (%) 5.2 6.2 6.4 12.6
 Net fixed assets 9.2 10.1
 Current assets 78.7 6.6
 Current liabilities 11.0 20.8
 Borrowings 10.4 4.3
 Reserves & surplus 5.2 0.2
 Count of Cos. 3,461 3,444 3,430 86
Numbers are net of P&E
Updated on: 27 Apr 2018 9:20AM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.5 1.5 5.1 1.6
 Expenses 5.6 1.7 5.1 0.7
 Net profit 0.0 -10.3 23.7 9.2
 PAT margin (%) 3.1 2.8 3.6 8.3
 Assets 9.5 10.0 6.9 3.3
 Net worth 8.5 11.4 6.0 2.8
 RONW (%) 5.8 4.9 5.9 12.7
 Count of Cos. 25,647 23,668 20,755 19
Non-financial Companies
 Income 4.7 0.6 4.7 1.5
 Expenses 4.9 0.0 5.2 0.6
 Net profit -8.6 18.4 18.0 10.7
 PAT margin (%) 2.0 2.5 3.1 7.4
 Net fixed assets 13.3 17.3 5.4 4.4
 Net worth 6.9 12.0 4.4 2.9
 RONW (%) 4.6 5.1 6.0 11.5
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 11.8
 Net working capital cycle (days) 66 65 62 38
 Count of Cos. 20,897 19,807 17,287 17
Numbers are net of P&E
Updated on: 18 Apr 2018 11:50AM

Time series available from 1990 onwards