The Indian economy might spring a surprise in the second quarter of financial year 2014-15 and register a growth in its gross domestic product (GDP) close to 6%. This upside could be driven by a gradual pickup in sectors like utlities, government expenditure and even other sectors like consumer durables, says Barclays Research in a report released today.
The reasons for an upbeat forecast is clear and not unlikely. The first positive is derived from the power and coal sectors. While coal production and imports are both likely to go up, even power generation utilities are expected to increase capacity utilisation and addition. This means they will expand their capacity and use the capacity they already have more rigorously to give better returns. The research report expects project clearances to be fastened up and the investment cycle to benefit from it.
For the consumer sector, it sees improvement in travel and tourism and consumer durables. The auto sales have been robust this quarter and consumer sentiment could be on a rising track now. The report mentions surveys done by RBI and ManPower which shows that the overall sentiment regarding jobs in India has also improved.
The mood has definitely changed after the change in the government. Since May 1 this year, the BSE Sensex has given a return of 15.5% while the BSE 100 index has given a return of more than 16%. The enthusiasm is reflected in other research houses as well. Crisil wrote in a post Budget note that the government has put back the economy on the right path. The report lauded the 24% rise in allotment for infrastructure, but revised down the GDP estimates for 2014-15 from 6% to 5.5%.
However the report also mentions what could act as spoilers amid all the optimism.
1. The government might be keen on keeping its expenditure under control which will act as a demand dampener. Any rise in government expenditure is generally expected to boost personal and community spending abilities.
2. Construction-related sectors have been laggard in the current quarter and any improvement in their activities might not happen in a hurry.
3. For the auto sector, it is unclear to what extent the rise in auto sales is sustainable since the rise in demand could be due to the excise duty cuts announced in Jaitley's Budget, and it was also proposed in the Interim Budget represented by the UPA government.
Also, there has been no improvement in commercial vehicle sales. Though positive on Maruti Suzuki, brokerage firm IIFL is not bullish about Mahindra and Mahindra, and Tata Motors.
But there are other issues that can be added to the woes the economy might be facing:
4. To this, one can add the real estate sector. DLF announced its results recently and reported good revenue and operating profits numbers. However,its pre-sales remained weak and the company has given out a cautious outlook for the near future. A report released by Liases Foras shows that real estate sales have dropped 20% in Delhi-NCR,18% in Chennai, 13% in Hyderabad and 2% in Mumbai. Clearly, real estate prices are too high and unaffordable even for investors.
5. The coal-power sector still needs a vigorous policy push. The government has cut down e-auction volume from 58 million tonne last year to 25 MT in 2014-15 which will bring down its earnings per share. CIL makes bigger margins through e-auction than it does through selling coal at fixed agreements. The government wants CIL to supply more coal at lower prices to generation companies that do not have enough supply of coal even if this hits the profit of CIL. But CIL will not easily accept the proposal and this constant tussle over coal and profits must find a long-term solution.
6. Finally, the growth in the consumer sector might not be sustainable as well. Standard Chartered says that the subdued performance of consumer companies Colgate, Godrej, ITC and HUL might not improve even in the second quarter. Sanjay Singh, Director, Standard Chartered said in an interview to CNBC TV18, "So consumer staples this quarter in terms of topline and demand has seen a step down from what we were seeing till now." Company managements have conveyed that the September quarter could also be bad, although there could be some improvement from December quarter onwards. "However, key improvement will come only in financial year 2015-16," he added.
The new government has shown its intent on improving growth rates, but has not yet taken steps at improving major policy issues like power, aviation losses etc. As a result, a strong GDP growth in the economy might take longer than expected.
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