India Economy

It’s time to take a reality check on consumption

Parvatha Vardhini C | Updated on June 07, 2018

Corporate results show strong demand, but GDP numbers don't agree

The GDP data released last week has brought much cheer to the economy. From 5.6 per cent in the quarter ended June 2017, GDP growth (year-on-year) has gradually improved over fiscal 2017-18, recording 7.7 per cent in the three months ended March 2018, indicating a convincing recovery from the twin shocks of demonetisation and GST transition.

But the same cannot be said of the private final consumption expenditure (PFCE) numbers which constitute 50-60 per cent of GDP. PFCE growth (year-on-year ) remained somewhat stagnant, and even deteriorated once, in the four quarters of 2017-18.

Thus, while headline GDP numbers show a good pick-up, PFCE numbers still remain dodgy. This indicates that demand continues to be iffy after the headwinds faced from the note ban and the GST move.

Out of sync

But a comparison of the quarterly results of consumer-oriented companies with the PFCE numbers tells us a different story. A study of the results of listed companies for the four quarters ended June 2017, September 2017, December 2017 and March 2018 shows that both revenue and profit growth (year-on-year) have seen a definitive pick-up.

From a modest revenue growth of 5.3 per cent and 8 per cent shrinkage in profits in the June 2017 quarter, the aggregate results of companies in the auto, appliances and fast-moving consumer goods spaces have shown a steady improvement to record 22.3 per cent revenue growth and 30 per cent profit growth in the January-March 2018 period.

Besides, despite all the farm loan distress and crashing prices of crops, it is not as if a cut-back in spends from rural India is pulling down the PFCE numbers.

Management commentary from companies which have a considerable rural exposure, such as Hindustan Unilever, Dabur India, Hero MotoCorp and Escorts, shows that rural demand in many cases across the country has been growing even faster than urban demand in the past 2-3 quarters.

As economists put it, the contribution of agriculture to economic growth has been steadily declining over the past few decades. As per data from the Central Statistical Organisation, in the 1970s, about 70 per cent of rural India’s growth came from agriculture.

This came down to less than 40 per cent in 2011-12 (the latest data available). Hence an up-tick in non-farm income has been fuelling the rural demand.

Also, rising government spending and investment have directly and indirectly put more money in the hands of both the rural and the urban consumer. Thanks to factors such as Pay Commission-related salary hikes, growth in government spending (government final consumption expenditure) stands tall at 16.8 per cent in the quarter ended March 2018, much higher than the previous two quarters. This apart, while private capex remains weak, government capital spends through schemes for roads, affordable housing and rural infrastructure have driven growth in the gross fixed capital formation (GFCF) portion of GDP. Growth in GFCF has improved steadily from 0.8 per cent in the June 2017 quarter to 14.4 per cent now, reflecting the up-tick in government investments.

Yet, while all this data point to a robust pick-up in private consumption, PFCE growth figures look less rosy.

A wide berth needed

Adding to the intrigue is the wide variation between the initial estimates and the revised PFCE numbers. For instance, the third-quarter PFCE growth number stood at 7.9 per cent when the GDP figures for that period were announced. This was despite the high base effect of 11 per cent growth in the third quarter of 2016-17.

Nevertheless, this was seen as a pick-up after the growth recorded in the first two quarters, and also in line with the upswing in corporate numbers. But this 7.9 per cent growth has now become a case of ‘too-good-to-be-true’.

In the latest release, the PFCE growth number for the October-December 2017 quarter has been revised downward by a huge two percentage points to 5. 9 per cent. Considering that other indicators such as corporate results show a steady up-trend in demand, quarter after quarter, the sharp variations in PFCE growth rate create more uncertainty over the direction of growth.

Economists point out that PFCE growth numbers need to be given a wide berth. With a huge unorganised/informal segment in operation in the country, the listed/organised segment is not fully representative of consumption trends. As more and more data from the informal and unorganised segment come in, a revision, big or small, is bound to happen — more so this year, with the added hiccups of GST implementation.

They also say that unlike government spends/investments, or even private-sector capex, private consumption is a derived number in GDP estimates. Hence, it could be more vulnerable to fluctuations and changes.

Published on June 03, 2018

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor