Most commentators have explained the big loss in economic momentum in the April-June quarter by talking of the pre-GST destocking, as also the lagged effects of demonetisation; GDP growth in Q1FY18 came in at a three-year low of 5.7% y-o-y, driven down by manufacturing which clocked a frightening five-year low of 1.2% y-o-y. With the GST impact likely to be over with re-stocking taking place in the current quarter, most are looking at growth picking up over the next few quarters. Crisil, for instance, is looking at GDP growth of 7% in FY18 as compared to 7.1% in FY17, with manufacturing growth at a healthy 7.6% in FY18, though lower than FY17’s 7.9%. Agriculture, in this scheme of things, is projected to grow at 3% in FY18 as compared to 4.9% in FY17—the high base, however, means even a 3% growth is quite good.
What is worrying, however, is the collapse in agriculture GVA in the first quarter despite the reasonable rabi output, and the implications of this for both agriculture growth for the full year as well as for overall consumer demand, the main driver of GDP growth for several quarters. Agriculture GVA collapsed to 0.3% in Q1FY18, after growing at an average of 8% in the two quarters before this, thanks to a collapse in prices following a bumper crop. Combine this with the fact that consumer confidence is at a three-year low (RBI survey) and the fact that rural confidence has fallen the fastest (BSE-CMIE survey)—in other words, it is not clear if consumer demand can continue to grow at a robust pace as in the past; private consumption, as our page one story today shows, has been slowing for two quarters already.
The rural economy, as HSBC economist Pranjul Bhandari points out, presents a complicated picture. With a good monsoon and sowing on track, rural wages are growing—to a three-year high—and unemployment is slowing; this augurs well for rural demand growth in FY18. But, thanks to the collapse in agriculture prices, the landed class of farmers has been hit badly, and that explains the rise in rural indebtedness and the clamour for loan waivers—unless the more prosperous part of rural India feels richer, it will be difficult to sustain demand growth. If the government wants rural demand to pick up—30% of sales of companies like Maruti Suzuki and Hero Motocorp come from rural areas—it has to find ways to alleviate the stress immediately. Higher MGNREGS allocations are one way out, as are increases in MSP—but given how few farmers sell to state agencies, the latter may not help as much. Encouraging exports by lifting price/quantity curbs is a good way to boost farm incomes—basmati rice exports rose 24% in April-July this year—as a stable source of external demand will prevent agriculture prices from collapsing every time there is an increase in production, but it is not clear whether the government is ready to completely free up farm exports as a long-term strategy. Equally worrying, as a recent Kotak Institutional Equities report points out, despite the monsoon being ‘normal’ at an overall level—total sown area is just 0.6% lower than last year at an all-India level—several parts of the country such as Haryana, Uttar Pradesh and Madhya Pradesh have had a deficient monsoon; areas like Haryana, though, are mostly irrigated and so may not be affected much. Though the non-farm sector, which accounts for 30-40% of the rural economy, doing relatively better than the farm sector will act as a cushion to demand, reviving the rural sector is key to good GDP growth in FY18.