 "Uncertain outlook for GDP growth")
Reflecting the muddled economic outlook, growth forecasts, for the first quarter, range from 7.4 per cent to 7.8 per cent. Rating agency CARE expects GDP to grow at 7.4 per cent in Q1 of FY17. By comparison, Goldman Sachs has projected growth at 7.8 per cent. ICRA, on the other hand expects, gross value added (GVA) at basic prices to grow at 7.2 per cent in Q1 of FY17, down from 7.4 per cent in Q4 of FY16.
But an analysis of the key drivers of growth suggests that growth is unlikely to surprise on the upside in the first quarter.
Much of the impetus to growth in the current financial year is expected to come from higher agricultural growth, on account of a good monsoon season, which in turn would spur rural demand. "A good monsoon this year is likely to boost agricultural production which will provide an impetus to rural consumption," says Frederico Gil Sander, senior country economist, World Bank.
Part of the explanation stems from the fact that in the first quarter, agricultural growth only captures production during the fag end of the rabi crop. This according to Pronab Sen, former chairman, National Statistical Commission, wasn't that great due to unseasonal weather. Add to that two years of back-to-back droughts which have lowered water levels and it suggests that production may not have perked up by that much. The much-awaited monsoon effect will only be visible towards the beginning of the third quarter when the kharif crop will be harvested.
But this pessimistic view is in contrast to advance crop estimates which show a good rabi crop. The divergence between the two can be explained by the view held by some economists that the advance crop estimates may have overstated production. This view is supported by data which show that government procurement of wheat is actually lower by comparison. According to ICRA's estimates, agriculture and allied activities are expected to grow at 2.2 per cent in Q1 of FY17, down from 2.6 per cent in Q1 of FY16.
Madan Sabnavis, chief economist at CARE, though is optimistic about agricultural growth in the first quarter on the ground that aggregate growth may be driven up by allied agricultural activities such as forestry, fishing and livestock.
On the performance of industry too, there appear to be mixed views. ICRA expects industry to grow at 7.1 per cent in Q1 of FY17, up from 6.7 per cent in Q1 of FY16, with manufacturing clocking 8 per cent in Q1 of FY17, up from 7.3 per cent in Q1 of FY16.
But this estimate is in sharp contrast to the performance of the Index of Industrial Production (IIP). IIP grew at a mere 0.6 per cent in Q1 of FY17 compared with 3.3 per cent in the year-ago period.
It is likely that growth may, in fact, be higher than that observed in IIP as industrial growth under the new GDP series has consistently outperformed that observed through IIP. ICRA's estimate of 7.1 per cent growth is based on corporate earnings which suggest that the full impact of the increase in commodity prices is yet to be felt in the current financial year. "As a result, growth in earnings has been higher than revenue growth, and is also likely to have exceeded the volume trend revealed by the Index of Industrial Production (IIP)," says Aditi Nayar, senior economist at ICRA. Add to that the fact that electricity generation, which rose to nine per cent in Q1 of FY17, up from 2.3 per cent in Q1 of FY16, and outlook for industrial growth looks better.
But juxtapose this with the outlook for capital formation on the expenditure side and the outlook for growth going forward is worrying.
The capital goods segment in IIP has contracted by 18 per cent in Q1 of FY17 and coupled with the decline in government capital expenditure, the outlook for an investment revival is worrying. In fact, as India Ratings and Research (Ind-Ra) notes, the Business Confidence Index of National Council of Applied Economic Research (NCAER), which had reached 148.4 in January 2015 has actually slipped to 121.6 in April 2016. This, as Ind-Ra notes, suggests that despite several initiatives taken by the government to revive investments, "it has failed to rekindle animal spirits in the economy". With stressed corporate balance sheets and low capacity utilisation rates, Ind-Ra expects investments to grow barely at five per cent in FY17, largely on the back of government capital expenditure.
But the worrying bit is that prospects for government (Centre and states) capital expenditure aren't that bright either.
For one, Sen believes that state governments are worried on account of outflows arising from higher compensation courtesy the Seventh Pay Commission recommendations. This could put both state government consumption as well as capital expenditure under pressure.
Further, limited fiscal space is likely to prevent an uptick in the central government's capital expenditure to offset any decline at the state level. Add to this lingering asset quality concerns for banks, which is likely to limit their ability to finance a stronger revival in private investment growth.
Thus "with private investment continuing to be sluggish, in the short term, consumption will drive growth," according to Sander. But though a good monsoon is likely to boost rural demand and that coupled with the Pay Commission award could boost aggregate consumption, this effect will show up only towards the beginning of the third quarter.
ICRA therefore expects GVA to record an uptick of 50 basis points to 7.7 per cent in FY17, largely on the back of higher growth in the second half of the year. Ind-Ra has revised its GDP estimate for FY17 upwards to 7.8% (FY16: 7.6%) from its earlier forecast of 7.7%.