By Invitation. Some green shoots, but will they hold up?

A host of economic data released over the last month provides some closure to FY2017 and offers clues regarding what lies in store for the new fiscal.

The April 2017 data calendar kicked off on a subdued note, with the Index of Industrial Production (IIP), which is released with a six-week lag, contracting by 1.2 per cent in year-on-year (YoY) terms in February 2017.

However, several volume-based indicators tracked by ICRA, spanning mining, electricity, manufacturing, trade, transport and financing, recorded a YoY improvement in growth in March 2017, relative to the previous month, in the most broad-based uptick since the note ban.

Core sector growth improved to 5.0 per cent in March 2017 from 1.0 per cent in February 2017, with double-digit growth of coal and steel output. In contrast, cement volumes continued to contract by 6.8 per cent in March 2017, signalling that construction activities are yet to fully recover from the note ban.

Auto production registered expansion across passenger vehicles, commercial vehicles and two-wheelers in March 2017, as well as a sequential improvement relative to the growth performance in February 2017.

Both merchandise imports and exports posted multi-year high expansions of 45.3 per cent and 27.6 per cent, respectively, in dollar terms for March 2017, partly reflecting higher commodity prices. Within the transport and logistics sectors, the pace of YoY expansion of rail freight, consumption of diesel and of ATF improved in March 2017, relative to the previous month, although growth in petrol consumption and passenger traffic by domestic airlines displayed moderation.

In terms of financing, commercial paper outstanding recorded a sharp YoY growth of 52.9 per cent on March 31, 2017, up from the paltry 4.7 per cent at the end of the previous month. Moreover, the YoY growth of non- food credit improved slightly to 5.8 per cent on March 31, 2017, from 4.8 per cent on March 3, 2017. However, bank deposit growth eased to 11.8 per cent from 12.7 per cent, respectively, as remonetisation dampened the seasonal surge in deposit accretion.

The question persists whether this pick-up in volume growth will sustain, going into FY2018. The uptick in March 2017 can partly be attributed to the recovery engendered by remonetisation, which is likely to prove relatively sustainable.

However, an attempt to meet year-end targets may have resulted in channel stuffing in some sectors in March 2017, given the somewhat weak performance in January-February 2017. Such sectors may record a slide in growth in Q1 FY2018.

Additionally, with the Goods and Services Tax (GST) to be implemented from July 1, 2017, ICRA expects industry to pare inventory levels during the transition, mildly dampening production in Q1 FY2018. Moreover, Q2 FY2018 and Q3 FY2018 are likely to witness temporary disruption, as the assessees get used to the new compliance procedures. The positive impact of GST on economic activity is likely to be visible from Q4 FY2018 onwards.

The India Meteorological Department’s (IMD) first-stage forecast for 2017 has estimated the volume of South-West monsoon rainfall to be 96 per cent - plus or minus 5 per cent of the long period average (LPA). Current reservoir storage, at around 27 per cent of the full capacity, exceeds the level in 2016.

However, it may not prove adequate to shield the crops and rural incomes, if the rains are weaker than the IMD’s initial forecast, as was the trend in the last three years.

Notwithstanding the modest contribution of agriculture to the overall economic activity of around 15-16 per cent, the monsoon outlook will impact consumption sentiment for non-durables and big-ticket items such as agri-inputs, motorcycles, tractors, etc.

Regardless, a likely rise in minimum support prices (MSPs) for various crops and automatic stabilisers such as the rural employment guarantee scheme, will support rural consumption to some degree.

Inflation readings for March 2017 provided positive signals, with the CPI and WPI inflation coming in lower than market expectations. Factoring in the IMD’s monsoon projection, the expectation of a moderate hike in MSPs, some price resetting post-GST, stable global commodity prices and a modest weakening of the rupee, ICRA expects CPI inflation to average 4.5 per cent in FY2018.

However, this will exceed the 4 per cent level being targeted by the Monetary Policy Committee (MPC) of the Reserve Bank of India. Given the hawkish tone of the minutes of the MPC’s April 2017 meeting, there is a growing likelihood that the next rate action after a long pause would be a rate hike, something that the industry should prepare for.

The writer is Principal Economist, ICRA Limited

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