It’s a funny no man’s land for the Indian economy. There are professionals who now completely deny being affected by the slowdown (“We never felt it, really”). There are companies insisting that the government’s fiscal sops should “stay for a while”. Then there are the economists who quickly add “nobody can really say” after every prediction. Topping all this are hard numbers, the envy of most of the world. Make no mistake: 7.9 per cent GDP growth in the second quarter has surpassed the expectations of forecasters, including India’s chief statistician Pronab Sen. As a terrible year winds down, is it then time yet again to celebrate the Indian story? The answer, for once, is unequivocal: not yet.
Most analysts agree that while the third quarter (September-December) will see a dip—that’s when the impact of the drought will become visible—it is the first three months of 2010 that would provide a firmer view on the sustainability and robustness of the growth graph. “Nobody can say with certainty that non-agrarian sectors will not feel the drought impact,” says Sen. Add the other worry lines—the sluggish pick-up in credit and consumer demand, coupled with high food inflation—and it becomes clear that despite the “cautious optimism”, the high-growth days of yore are not yet upon us.
The key will be a good winter crop. “How much agriculture will make up in Q-4 remains to be seen,” says Anil Sharma, agro-economist with NCAER. Currently the soil condition and water reservoir position is comfortable for crops sown in winter. But because of the drought, rural consumer demand is likely to be hit. D.K. Joshi of crisil expects the next quarter to “see a significant dip because of agriculture, with the overall headline GDP coming down to five per cent.” The only thing that could push it upward would be the non-farm sector, provided there is more fresh investments and rise in consumer-driven demand.
No doubt the investment climate has improved, “but it’s too early to proclaim a revival,” says Shashikant Hegde, ceo of ProjectsToday. Unlike the private sector—which shows a 15 per cent increase in investment plans during April-September 2009—there has been an over 47 per cent dip in new government investment proposals. Joshi also underlines that the rise in private sector investments “are largely linked to the government’s stimulus and infrastructure focus.”
Banking sources reinforce that overall credit offtake has not really picked up as yet. Post Q-2 results, bankers have scaled down their original expectation of 20 per cent growth in credit offtake this year despite hope for a better response in the next two quarters. “Conservatively speaking, I expect credit growth will not even meet the central bank’s set target of 18 per cent. I would anticipate it will be in the range of 14-15 per cent,” says a senior public sector banker.
“Going forward, we expect the growth to be softer than it has been in the first half. This is a change because, traditionally, growth is more robust in Q-3 and Q-4,” says Sachidanand Shukla, chief economist at Enam. Since most of the arrears of the Sixth Pay Commission have already come into the system, there is likely to be only some amount of inflow from that segment over the next two quarters from banks and so on.
Torn between keenness to push the growth momentum and concerns over a growing fiscal deficit, which has reached 7.9 per cent, the government has assured Parliament the fiscal stimulus will be continued till March-end. This is a double-edged sword. Of course, a hike in interest rate may dampen private investments and consumer spending, which has been on the rise, particularly in the automobile sector, due to softer credit terms. But the generous tax cuts don’t seem to have benefited consumers, as product prices have not come down. “So the excise duty cuts may not have resulted in a spurt in demand, though it may have helped companies’ bottomlines,” says Rajeev Dimri, head, indirect tax practice, BMR & Associates.
But no one wants to rock that boat, particularly when the global context is far from certain. Then, some sectors, particularly export-oriented ones, are still to recover from drop in sales, resulting in job and salary cuts. The good news is that the decline in exports has really slowed down. “It will be useful, at least for the next six months, to keep up with the (revival package) rates, so that more people can benefit,” says Rohan Shah, managing partner, Economic Law Practice.
As Planning Commission member Saumitra Chaudhuri says, “it will take time for consumer sentiments, which are linked to business sentiments, to return from nervousness to a more normal scenario.” Clearly, the final arbiters—consumers—are yet to signal a return to healthy spending. The answer has a lot to do with the price of farm produce.
By Lola Nayar with Arti Sharma and Pragya Singh
