Moneycontrol Pro Panorama | A sanguine turn of economic data

Headline numbers may dazzle, but smart policymakers dig deep to find out the parts that make this up.

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Central bankers and other policymakers always say they are “data dependent”, and they should be. There is no substitute for hard data in policymaking. But many a time, maths plays tricks and economic data show frustratingly different pictures.

Take the case of India’s GDP data that blew past even the most optimistic assumptions among analysts. At 7.6 percent, GDP growth for July-September resembled a spry and healthy country rather than one bereft of animal spirits or coming out of a sugar rush. Indeed, the best part of the data is that growth was spearheaded by investments rather than consumption. Government capital expenditure surged, and private capex was showing its presence, too. Analysts are going back and recalculating their full year GDP growth estimations after this positive surprise.

Now for FY24, India could clock a higher growth rate than earlier envisaged. As such, revisions to growth rates were already done by some even before this data was released. The latest purchasing managers' index data only adds to the confidence on manufacturing growth. PMI for manufacturing rose to 56 in November, from 55.5 in October. 

Headline numbers may dazzle, but smart policymakers dig deep to find out the parts that make this up. Therein lie the likely troubles that India’s economy may face in the rest of the year and perhaps even the next. Agriculture output has slowed to an 18-quarter low which was on expected lines due to El Nino factors and a subdued kharif output. While the upcoming rabi harvest may show resilience, the outlook for rural demand is not sanguine. As such, India’s villages and small towns are cutting down consumption as FMCG firms still lament over the lack of recovery. The dichotomy that comes with a K-shaped recovery is very much around—consumption growth is led by urban and metro cities while rural towns remain listless. No wonder, private consumption expenditure growth was a measly 3.1 percent, slower than the previous quarter and year ago.

If we go even further, the consumption maths becomes dodgy. As our Chart of the Day shows, Indians aren’t shopping much, but they are borrowing big time. The scorching growth in unsecured personal loans and credit card outstanding was touted as evidence of strong consumption growth. But national accounts hardly show this optimism. One possible explanation is that rural distress could be dragging consumption while borrowing to fulfil desires is predominantly an urban phenomenon. Even so, many questions remain unanswered on this front.
While consumption could be a key risk domestically, the biggest bugbear seems to be external headwinds. In other words, the trouble for growth will come from outside the borders. Gaurav Kapur, Chief Economist at IndusInd Bank, explains in his comprehensive GDP piece here how the external sector will influence growth prospects in the coming quarters. “Global economic activity is likely losing momentum, as lagged effects of coordinated monetary tightening, sharp increase in post pandemic debt levels and its cost of servicing and geo-economic fragmentation, slow growth of output and trade. That would adversely impact demand for India’s exports,” Kapur wrote.
That has not made economists prune their expectations for the GDP number, though. Even Kapur expects GDP to grow by a healthy 6.5 percent or even 6.8 percent if the government keeps up with its spending power. For the next fiscal year too, the outlook is buoyant. The government will spend as the ruling party races towards a national election next year and carefully navigates the four assembly polls in the meantime. This would also put cash into the hands of the people. What will the average Indian do with it is the big question that determines the fate of private consumption growth or more than half of the economy’s prospects.

The picture here is not as clear as it needs to be. The restrictions on unsecured lending would dampen the exuberance in consumption related borrowing in the coming months. Rural demand may recover, but is not expected to be significantly buoyant.

Of course, the Reserve Bank of India (RBI) is the most optimistic about growth. While its estimate for the full year is 6.5 percent, the recent comments by Governor Shaktikanta Das hint at an upside. Next week when the six-member committee meets, domestic growth drivers would give enough comfort on growth for it to focus on inflation.

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