Subdued demand across sectors: Poor results, weak data may delay consumption revival

Economists are betting on festive season, good monsoon to drive the economy.

By: ENS Economic Bureau | Mumbai | Published:September 19, 2016 12:25 am

Going by the less than ordinary performance of companies, in the three months to June, a recovery in India Inc appears some time away. The disappointing results aren’t too surprising given high frequency data for recent months hasn’t really signalled any broad-based pick-up in economic activity.

Adjusted net profits for the BSE 30 set of stocks fell 1.4 per cent year-on-year while they were flat for the Nifty50 basket. For a larger universe of 2,642 companies (ex-banks and OMCs), net profits have fallen 2.7 per cent y-o-y on a top line that’s barely grown. Worryingly, the sum of operating profits and employee expenses, a proxy for GVA, increased by just 2 per cent in Q1FY16.

“We see limited scope for positive surprises in global and domestic ‘macro’ drivers but see scope for negative surprises in earnings,” Kotak Institutional Equities wrote.

Economists are betting on consumption to drive the economy in the second half of the year driven by spends in the festive season, a good sowing season which should boost farm incomes and more money in the pockets of government employees.

However, some economists are concerned the consumption spends expected to drive the economy, in the next few months, could be delayed. “Will expectations of GST implementation in H1’17 push back discretionary demand, despite the good monsoons and the 7th Pay Commission? We think there could be some postponement, especially if the prices of consumer durables, such as cars, are slated to slip by 2-5 per cent,” Indranil Sengupta, economist, Bank of America Merrill Lynch, wrote recently.

Capital expenditure will probably stay muted even though capacity utilisation may have inched up and sanctions for projects by banks were up 9 per cent in FY16. The fact is the pipeline of projects remains fairly empty and the total value of projects sanctioned in FY16 fell 5 per cent y-o-y to Rs 1.4 lakh crore.

Data for July and August has been disappointing. The sharp contraction in the IIP in July by 2.4 per cent was unexpected and broad-based across sectors; this was the second contraction in four months. Capital goods contracted for the ninth consecutive month dragged down by weak private sector investment and a slow start to public capex.

Sonal Varma, economist at Nomura, observed in a recent note, industrial growth has been weak since end-2015 and remains below the 3.5-4 per cent trend of last year. “Private investment is likely to remain lacklustre, but capital goods could receive a boost from the public sector where project awarding activity has picked up and should lead to higher capex by year-end,” Varma noted.

Slow growth and benign inflation have opened up the possibility of a 25 basis points rate cut at the October 4 policy, according to Samiran Chakraborty, economist at Citibank. Chakraborty pointed out the “upside risks” envisaged by the Reserve Bank of India (RBI) to its March, 2017 CPI target have substantially diminished now. “On the back of the soft economic activity data — Q1FY17 GDP at 7.1 per cent, July IIP contraction of 2.4 per cent y-o-y — and stabilisation of CPI within the target range, the RBI can bring forward another 25bps rate cut in the December policy as well,” Chakraborty observed. FE