India’s growth story patchy and not broad based, say economists

• Services sector consumption has been holding up but the picture while goods is ambivalent, say economists at Bank of Baroda.
• They do not see any revival in private sector capex in a broad based manner in this financial year.
• Debt issuances have gone up significantly; 80% is by companies from the financial services sector.
• The possibility of a rate cut has now been pushed to FY25, say BoB economists.
  

India’s investment and consumption story is not broad-based but patchy across sectors, according to Bank of Baroda economists. They said that a clearer picture could emerge in the next few months after the festival season while addressing the ‘State of the Economy’ webinar.

“A lot of how consumption will evolve for this fiscal year will depend upon Kharif sowing. As of now, the services sector is holding up with good pent up demand in travel and hospitality. But with goods, it has been ambivalent as seen in the IIP data of consumer sectors. We will know more after the September-October and November period,” said Madan Sabnavis, chief economist at Bank of Baroda.

The IIP numbers of June which were released last Friday came in much lower than expectations at 3.7%. While 14 of the 23 sectors in manufacturing registered negative growth, the most disappointing was the electronics sector which has been a front runner of the PLI scheme. “There is something in these numbers we are unable to piece together,” commented Sabnavis.

A fuzzy picture

With regards to investments too, most of the capital expenditure is being done by the government — with most coming from the central government. With regards to private capex, only the services sector of airlines is leading investment announcements. Within the industry, only the chemicals sector registered an increase.

“Investment picture is currently fuzzy and we do not see the private investment cycle beginning in a big way,” said Jahnavi Prabhakar, economist at Bank of Baroda.

Within the government spending too, there has been a deviation as normal central and state government spends are on par. But in the last two years, the centre has been spending more than the states. States that generally have a large capex outlay like Maharashtra and Uttar Pradesh are lagging behind.

Debt vs equity issuances

In spite of the Sensex hitting an all-time high, the equity issuances for FY24 till date have been lower than what was seen last year. This however is due to the base effect of LIC’s public offer last year.

Debt issuance however has gone up significantly — by over 81% during the same time. But here too most of the issuances — at around 80% are from the financial services sector with NBFCs and HFCs accounting to around 60% of them.

“Most of the NBFCs will be lending to the retail and services sector,” said Sabnavis, adding that he doesn’t see private sector capex revival this financial year in a broadbased manner.

Moreso, the interest rate scenario has too many variables in play like possible production side worries from lower pulse sowing, El Nino effect on climate and global situation. “There are pain points with regards to oil seeds sowing and hence edible oils along with pulses,” says Prabhakar.

The economists at the bank have also pushed the possibility of an interest rate cut to FY25 — and now believe that Indian central bank will maintain the status quo as long as inflation is within their expected lines.