Economy may pick up in Q2FY18, putting GST, demonetisation impact behind
If the corporate results so far are any indication, the economy may well have bounced back in the second quarter of FY18 after coming under pressure from demonetisation and the goods and services tax (GST).
Gross value added (GVA) by 300-odd firms grew at healthy 13 per cent in Q2FY18 in nominal terms, after falling to a four-quarter low of 8.4 per cent in Q1FY18. GVA of these firms had slowed down to 9.8 per cent in Q4FY17, after growing by 16.3 per cent in Q3FY17, mirroring the trend in the economy.
In the first quarter of FY18, economic activity was disrupted as companies pared production and de-stocked inventory to prepare for the shift to the new indirect tax regime. As a consequence, real growth slumped with manufacturing growing by a mere 1.2 per cent. Overall economy grew by a three-year low of 5.7 per cent in April-June quarter.
But if the estimates presented here are reflective of the state of the broader economy, then it suggests that the economy may well have bottomed out in the first quarter of FY18.
“The economy may well have bottomed out in the first quarter of FY18. The industrial sector seems to be doing better. Restocking by companies will boost numbers,” says Madan Sabnavis, chief economist at CARE, though he cautions that we may be overestimating the performance of the small and medium enterprises (SMEs).
“Based on the data so far, we expect real gross value added to grow at 6.3 per cent in Q2FY18, whereas GDP growth is expected at 6.4 per cent,” says Aditi Nayar, principal economist at Icra. “We expect a broad-based recovery in the industrial sector, with all the sub-sectors, namely mining, manufacturing, electricity and construction showing an uptick in YoY growth in Q2FY18, relative to the performance in the previous quarter,” she adds.
The data for the second quarter GDP are slated to come by this month end.
The index of industrial production (IIP) has grown by 2.6 per cent in the first two months of the second quarter, up from 1.9 per cent in the previous quarter. Growth estimates for the full quarter will be available in the next few days.
“We expect the economy to grow around 6.5 per cent in Q2 with the some of the effects on demonetisation and GST fading away. The manufacturing sector is picking up. The de-stocking in the first quarter is likely being gradually reversed,” says Suvodeep Rakshit, economist at Kotak Institutional Equities.
But the downside is lower central government spending.
Data from the controller general of accounts shows that a cash-strapped Centre has curtailed its expenditure in the second quarter of FY18 in order to meet its fiscal deficit target.
While in the first half of FY18, total Central Government expenditure grew by 11.8 per cent, spending in the second quarter has actually contracted by 3.4 per cent, after growing at a robust 27.1 per cent in the first quarter.
Some economists are hopeful that any decrease in central government spending is likely to be offset by higher state government spending.
“While the growth of non-interest revenue expenditure of the central government eased to a marginal 1 per cent in Q2 FY18 from 27 per cent in Q1 FY18, the impact of this is likely to have been partly offset by higher spending by state governments,” says Nayar.
But it’s difficult to say for sure.
Of the 11 large states whose monthly accounts are available for the second quarter – total expenditure has increased in six states namely – Andhra Pradesh, Chhattisgarh, Haryana, Odisha, Telangana and Rajasthan, while it has gone down in the states of Maharashtra, Punjab, Uttar Pradesh and Gujarat and marginally in Madhya Pradesh.
Source- Business Standard.