Heady to steady: Economic growth slows but becomes more broad-based

After a period of heady stock market gains alongside impressive gross domestic product (GDP) growth clips, things seem to have cooled off a bit. A barrage of recent data releases gives mixed messages — some positive, some negative, a few improving, others worsening. Meanwhile, the king of all data, GDP growth, comes with its own complexities, with questions around the correct price deflator and volatility in government subsidies. All of this makes it hard to get a clear read on the state of the economy’s growth.

 

We try to address this problem by casting our net wide to cover all areas where reliable, quick and monthly data are available. We bring together 100 indicators of growth, and map them to various sectors, both on the production side (agriculture, industry and services), and the expenditure side (consumption, investment and exports). We are careful to use the quarterly momentum in each indicator to glean out recent trends. Using the widest variety of data available should give a more thorough picture of growth trends.

 

We weight each sector according to its share of GDP to get an estimate of what proportion of the economy (or sector in the economy) is growing quickly. And how much of the economy (or sector in the economy) has slowed.

 

So, what’s the verdict? We find that 55 per cent of the economy continues to grow, while 45 per cent is not expanding. A quarter ago, closer to 65 per cent was growing and that moderation, from 65 per cent to 55 per cent, has likely affected sentiment.

 

On a sectoral basis, a few sectors are doing better than in the previous quarter. Agriculture has come off a disruptive period of heatwaves and volatile rains and is gradually recovering. In fact, with reservoirs full again, the sector could do better over the next few months.

 

Government spending has risen post-elections across both the current and capex accounts. It is likely that state capex will improve further, led by the government distributing another round of funds and interest-free capex loans from the Centre to the states. The rise in public capex is boosting investment growth, where we find that 60 per cent of the indicators are doing better now, compared to 40 per cent a quarter ago.

 

Even so, this still does not indicate a rise in the private investment cycle, particularly for machinery and equipment. Industrial credit has picked up quickly but much of the loan growth is working capital rather than in the form of term loans, which are usually a sign of a rise in private sector investment demand.

 

Finally, the diversification of the export basket towards professional services is helping exports hold up. In fact, every time it seems that services exports are beginning to slow, they rise even more sharply than before: For example, the record services trade surplus of $17 billion in October.

 

But then, there are several sectors that are faring worse than before. With the weather normalising, power demand and, thereby, growth in mining & utilities has softened. Trade and transport remain laggard sectors, even though the tourism sub-sector is doing well.

 

Finally, and most notably, consumption demand is weaker now, especially urban consumption. In fact, a breakdown of manufacturing also shows weaker consumer goods production (even as construction goods remain strong). A breakdown of credit data shows that even as industrial credit remains strong, consumer loans have softened from dizzying heights, though this is by design as the central bank has raised risk weights in its desire for financial stability. And, with equity markets correcting, the phenomenon of strong wealth effects propping consumption over the last few years may lose some sheen.

 

All of this is best reflected in the goods and services tax (GST). Growth in the cess bucket — which comprises higher taxes levied on luxury goods like high-end motor vehicles — has slowed more quickly than overall GST growth.

 

All said, while a lower proportion of the economy seems to be growing positively compared to a quarter ago (55 per cent versus 65 per cent), most of the indicators remain positive. And, while investment activity (especially construction- and public sector-led) is holding up, consumption-related investment is slowing.

 

While we have discussed activity indicators and how they are faring, we haven’t yet spoken about the underlying drivers and what’s to come.

 

We believe that the bulk of the exuberant growth over the past few years was led by the rise of “new India”, which comprises several high-tech sectors.

 

The rise in electronics (and other such) manufacturing, expansion of professional services produced by global capability centres, and the proliferation of digital startups, led to high incomes and growth at the top of the pyramid. However, after a few heady years, the base is rising, and growth in these sectors is normalising to more sustainable levels. For instance, growth in services exports has softened from 27 per cent year-on-year on average in FY22-23, to a still high 14 per cent in FY24.

 

Overall GDP growth is gradually converging from 7 per cent-plus levels to a more sustainable but still strong “potential-growth” level of about 6.5 per cent. If the improved prospects for agriculture stick, this new level of growth may be more equitably spread across the economy.

 

To conclude, even though there is a lower proportion of activity indicators growing as quickly as a quarter ago, we believe growth is normalising to more sustainable, more broad-based, and still strong levels. Clearly, a move from heady to steady.

 

The author is chief India and Indonesia economist and managing director (global research), HSBC