A ROBUST private sector performance may have paved the way for the lower-than-expected contraction in the GDP print for the second-quarter of this fiscal, effectively helping overcome a capital expenditure compression of 12 per cent and 23 per cent by the central and 11 state governments, respectively, during the first half of 2020-21. But experts warn that there are challenges ahead in the coming fiscal quarters.
Experts point to a larger drop in the post-festival season this fiscal, given the absence of demand to compensate for dissipating supply. They say the pent-up demand and festival-linked stocking up, which largely drove private performance in the second quarter, have run their course.
Other enabling factors that are unlikely to sustain include the anecdotal evidence being attributed to the increase in demand for inputs such as cement — people having gone back to their villages and added an extra room, as substantiated by a top executive of the Aditya Birla Group, which runs India’s largest cement manufacturer UltraTech Cement.
Other factors, such as the institutional demand for cars since the unlockdown as entrepreneurs exchanged old cars for new to avail depreciation benefits, is tapering off. Continued Government expenditure compression is another concern.
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“If my expectations are correct, then Q3 (third quarter ending December 31) should be worse than Q2. Usually for the festive season, production starts picking up from May, that’s the normal pattern and they stock up and sales peak during October and November. But since May and June were in lockdown, the process started late, which meant that two months of production, which would have otherwise gone into stocks, had to come in the next three months and this pushed manufacturing hugely. Now, that’s gone. The festival season is over, sales are done. Every year, post-festival season, there’s a dip in production. This year, there will be a larger dip. So, one expects things to worsen hugely,” Pronab Sen, former Chief Statistician of India and head of the Standing Committee on Economic Statistics, said.
Government expenditure will play a crucial role as the push from private sector supply dries up. “At one level, one can say they (the government) are holding back and will come with a big splash. But if it doesn’t happen, then at the end of the year, which is into the fourth quarter, states would have run out of money. So, there’s going to be a contractionary effect coming from reduced government expenditure by states. So the Centre has to go above that,” Sen said.
The GDP data released Friday showed a 7.5 per cent contraction in July-September as against a 23.9 per cent contraction in April-June. It also showed a 22.2 per cent contraction in government consumption expenditure in Q2 as against a 16.4 per cent growth in Q1.
There are other similar indications from sectors such as auto, where the supply push is appearing to be at odds with demand. The new registrations at the Regional Transport Offices across states are at variance with sales data provided by the industry body. The sales reports quantify the number of units dispatched from factories to dealers, while the RTO figures, which are comparatively lower, represent sales to end consumers, an executive with a leading carmaker said.
Given the variance, despatches are beginning to slacken now that festival stocking is over, executives with two leading manufacturers said.
As per Federation of Automobile Dealers Association (FADA), passenger vehicle retail sales in October recorded a year-on-year decline of 8.8 per cent, while data from Society of Indian Automobile Manufacturers (SIAM) had shown a 14 per cent year-on-year increase in passenger vehicles, reflective of wholesale sales.
The other reason for slightly robust car sales was because a section of people, who could afford to buy a car but had not bought it, are now buying them to avoid public transport amid the pandemic. That could taper out, especially given uncertainties about the recovery, industry sources said.
Growth in the third quarter, therefore, would be crucial to assess the course in the coming year, economists said. “IIP, being a volume indicator, shows a rise for 2-3 months during the festive season but then tapers off… GDP is based on value addition. If demand has not picked up, then the supply-side production will slow down after the festive season. So, Q3 will be crucial for determining whether the economy is becoming weaker, or stabilising or booming,” Devendra Kumar Pant, chief economist, India Ratings, said.
Sen said if new investments do not pick now, GDP in Q2 next year is likely to contract even as Q1 will rise due to a low base effect. “There were investments, which were already in the pipeline. Then things stopped for three months. After the lockdown was lifted, these investments were going to be brought to completion quickly. So what you are seeing now is old investment projects being completed,” he said.
“Whether new investment intentions are coming is the question and if they don’t, they will show up maybe about 8-12 months later. Till then, the pipeline will carry us. So if new projects are not coming in, then the investment is going to fall. Then Q2 next year could be negative because that’s when the current investment projects will start coming to an end,” Sen said.
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