Economy may pick up in Q2FY18, putting GST, demonetisation impact behind

GVA by 300-odd firms grew at 13% in Q2FY18, after falling to a four-quarter low of 8.4% in Q1FY18

Going by corporate results so far, the economy might have bounced back in the September quarter of this financial year (FY18), after the pressure from demonetisation and the goods and services tax (GST).

Gross value added (GVA) by 300-odd companies, which have reported their results, (nominal terms) grew 13 per cent in the quarter, the second one (Q2) of FY18, after falling to a four-quarter low of 8.4 per cent in the June quarter (Q1). 

The GVA of these companies had slowed to 9.8 per cent in the March quarter, after growing 16.3 per cent in the earlier, December, quarter. 

In Q1 of FY18, economic activity was disrupted as companies pared production and destocked on inventory to prepare for the shift to the new indirect tax regime, GST. So, real growth slumped, with manufacturing growing only 1.2 per cent. The overall economy grew by a three-year low of 5.7 per cent in April-June.

So, if the estimates presented earlier do reflect the state of the broader economy, the economy might have bottomed out in Q1, says Madan Sabnavis, chief economist at CARE Ratings. "The industrial sector seems to be doing better. Restocking by companies will boost the numbers," he adds, while cautioning that we might be overestimating the performance of small and medium enterprises. 

"Based on the data so far, we expect real GVA to grow 6.3 per cent in Q2, whereas GDP (gross domestic product) growth is expected at 6.4 per cent," says Aditi Nayar, principal economist at ratings agency Icra. "We expect a broad-based recovery in the industrial sector, with all sub-sectors, namely mining, manufacturing, electricity, and construction, showing an uptick in year-on-year growth in Q2, relative to the performance in the previous quarter."

Data for GDP in the September quarter are expected by the end of this month.

The Index of Industrial Production grew 2.6 per cent in the first two months of Q2, up from 1.9 per cent in the previous quarter. Growth estimates for the full quarter will be available in the next few days. 

"We expect the economy to grow around 6.5 per cent in Q2, with some of the effects on demonetisation and GST fading. The manufacturing sector is picking up. The destocking in Q1 is likely being gradually reversed," says Suvodeep Rakshit, economist at Kotak Institutional Equities. 

The downside is lower central government spending. Data from the Controller General of Accounts shows a cash-strapped Centre had curtailed its expenditure in Q2, to meet its fiscal deficit target. In the first half of FY18, total central expenditure grew 11.8 per cent, but this was after a surge of 27.1 per cent in Q1. Spending in Q2 actually contracted by 3.4 per cent.

Some think this might be offset by higher state government spending. "While the growth of non-interest revenue expenditure of the central government eased to a marginal one per cent in Q2 from 27 per cent in Q1, the impact of this is likely to have been partly offset by higher spending from state governments," says Nayar. 

However, one can't be sure. Of the 11 large states whose monthly accounts are available for the September quarter, the total expenditure rose in six - Andhra, Chhattisgarh, Haryana, Odisha, Telangana, and Rajasthan. It went down in Maharashtra, Punjab, Uttar Pradesh, and Gujarat, and marginally in Madhya Pradesh.

Measuring up
Gross Value Added (current prices , % YOY)

Q2FY17	15.3
Q3FY17	16.3
Q4FY17	9.8
Q1FY18	8.4
Q2FY18	13.0
Note: Based on 303 firms' data