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Posted on 30-Nov-2018 Comments  0

Q2 GDP Numbers

There is certainly disappointment on the growth front

When the GDP growth numbers for the second quarter were announced on November 30th, there was certainly a sense of disappointment. At 7.1%, the growth rate was a far cry from the 8.2% growth clocked in the first quarter. One can blame it on the base effect because the first quarter was on the back of pre GST slowdown in the previous year. However, if one scrubs through the fine print of the GDP numbers, there are 3 broad areas that emerge. 

Weak consumption demand

One of the worrying features of the second quarter was that there was a serious pressure on consumption demand. Normally, consumption demand tends to be sticky. A temporary fall in income levels does not impact consumption in a big way. It is only when the impact on incomes sustain that consumption gets impacted. That is what we have seen in the second quarter. The impact has come due to two reasons. Firstly, the higher oil prices have been a big dampener to the India consumption story. With oil consistently high during Q2, the impact was felt on fuel demand, auto demand and a host of downstream inflation effects. Then there is the issue of rural demand. There was a huge rural thrust expected but with prices stagnant despite higher MSP, there has been little respite. That contributed to muted consumption demand during the quarter. This is one aspect that came out clearly in Q2.

Stress on farm incomes

In the second quarter it was agriculture that proved to be the bug bear. Consider some of the numbers. The agriculture sector grew at just about 3.8% in Q2 compared to 5.1% in Q1. As a result, manufacturing also took a hit growing at just 7.4% in Q2 compared to 13.5% in Q1. One reason was weak farm prices, which is captured by the nominal GVA. The nominal GVA fell to just 2.8% showing weak price increases despite a very generous MSP policy on paper. This is likely to have larger implications for rural demand; since that is what determines rural demand. But the big giveaway is the agriculture price deflator turning negative for the first time since June 2017, showing signs of farm distress. The redeeming feature was the 12.8% growth in government expenditure which was an attempt to prop up the morale of the economy.

Services are not growing

Expectations are one thing but holding on to current advantages is another. The services sector, that drove growth, for over a decade is stagnating. Sectors like IT, telecom and banking used to be the big contributors. That is where the real pressure is coming from. With more than half the weightage in the GDP, it is services sector that needs to actually drive growth in India. Unless this sector picks up, GDP may find it hard to reach the annual target of 7.5%!

Corporate Governance

We may be seeing the first signs of boards coming of age

Directors resigning from the boards of Indian companies with a diplomatic letter to the board are nothing new. But what happened with the JM ARC board recently marked a major shift in the way independent directors have acted. Anil Khandelwal, independent director on the board of JM Financial, ARC went on to resign putting down serious governance issues as the reason in his resignation letter. So, what exactly were the major concerns that he had?

What happened at JM ARC?

In a span of a few days, two very senior bankers, H N Sinor and Anil Khandelwal, resigned as independent directors from the board. While Sinor was subdued in his tone, the letter from Khandelwal was a lot more direct. In his mail to the chair, Khandelwal highlighted serious lapses in corporate governance on the board of the ARC. Firstly, he has highlighted that most members of the board had chosen to ignore constant reminders about the falling standards of governance followed. Khandelwal had also objected to the practice of inviting non-board members to board meetings. This is a common practice in family run businesses but Khandelwal had felt that it was against corporate governance practices. Lastly, Khandelwal had also objected to the board assigning executive powers to the non-executive chairman of the board. Despite his constant reminders, Khandelwal opined that the board had done little; leading to his decision to resign.

A step away from diplomacy

The move is significant because it marks a clear step away from the standard practice. In the past, most independent directors had avoided confronting the board. By putting down his reasons for the resignation on paper, Khandelwal has actually helped to highlight serious lapses in the standards of corporate governance. There have been concerns, especially in cases like IL&FS, that a more assertive bunch of independent directors could have avoided the crisis altogether. Being privy to the most privileged information about the goings on at the company, these independent directors are the best positioned to raise the red flags. To that extent, putting down the reasons for resignation on record puts a lot more pressure on company boards in future.

Onus is now on others

The onus is now on other independent directors and also the institutional stake holders to assert themselves in the larger interests of shareholders. A major lesson learnt in the last few months is that stock markets are going to really punish companies for weak corporate governance. We saw that in case of Yes Bank, ICICI Bank, Infibeam, Manpasand Beverages and PC Jewelers. It is time for independent directors to take on more accountability for their role on the boards of companies. Khandelwal may have set the cat among the pigeons and it may actually be good for India Inc! 

Beyond GDP

India may grow fastest but there are problems underneath


While announcing the GDP numbers for Q2, Mr. SC Garg boasted that India would still be the fastest growing economy in the world. While that is true on paper, the claim glosses over a lot of larger problems that could manifest in the coming months. Let us look at two sets of macroeconomic issues that are actually being glossed over today.

Where is the growth

On paper the 7.5% growth looks quite enticing but the question is where the growth is visible? Obviously, there is not much growth happening in agriculture. The services sector is still growing at around 6% with most of the sectoral drivers like banks, financial services and telecom under tremendous financial strain. Manufacturing still remains under overcapacity and limited fresh investments other than in steel. The growth is largely being driven by aggressive government spending on public services and infrastructure.

Dwell on shaky macros

There are a lot of challenges that the Indian economy is facing. To begin with, it is still too vulnerable to the global oil prices. India imports nearly 85% of its daily oil needs and that is the one factor that impacts the trade deficit and the domestic inflation. For the past few months, inflation has been subdued. But, the GDP numbers for the second quarter reveal that low inflation in India is more an outcome of a slowdown in consumption demand rather than price control. That is not a good signal. But the bigger worry is on the government borrowings. India has already crossed the full year fiscal deficit target in the first seven months. We tend to just focus on the Central fiscal deficit which is at around 3.5%. If you add up the state fiscal deficits, the overall deficit is closer to 7%. Government debt at nearly 70% of GDP could be the biggest challenge. It is time to look at the hard reality beneath the GDP numbers!

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