At a time when much of the macro data flowing in shows that India’s growth engine is slowing down, there are visible green shoots to suggest that a recovery may be around the corner. While there is a disconnect between the two, a consumption-led demand boost looks possible in 2016-17, which followed by a pick-up in private investments, can potentially place the economy in a high-growth orbit.
The most significant pointer to an uptick is a rebound in sales of light commercial vehicles such as pick-up and mini trucks used for last-mile connectivity, indicating improving economic activity. More than this, it is the motorcycles story — which represents more rural than urban demand — that is getting India Inc excited. “Rural India is more a motorcycle market given the difficult roads. Here sales are lighting up,” says Sunil Munjal, Joint Managing Director, Hero Motors, the largest two-wheeler manufacturer in India.
Total motorcycle sales increased 16.24% in April and sales of scooters, more an urban choice, jumped 35.86% in April. “The larger picture is quite clear now, you can see growth across some geographies and some industry sectors,” adds Munjal, who is also a past-president of the Confederation of Indian Industry. Motorcycles sales have been growing in two digits since January this year, after a marginal 0.44% increase in December 2015.
But more credible signals are those emanating from the commercial vehicles (CVs) segment, which has a strong correlation with economic activity. And within CVs, it is growth in light commercial vehicles (LCVs) that has raised hopes now. “It (LCV sales) has picked up in the last three months. This is a huge positive,” says RT Wasan, Vice President, Sales and Marketing, Tata Motors, the largest player in the commercial vehicles market.
Higher infrastructure spend (roads and rail) and higher expenditure by many states resulted in higher demand for cement, fertilisers, steel and metals, which, in turn, spurred commercial vehicle sales in 2015-16. Sale of heavy and medium commercial vehicles jumped 30% last year. But LCVs had remained flat. Over the last four months, LCVs shifted gears. For Tata Motors, LCV sales continued to decline till November 2015. It turned the corner in December and continue to grow during January-March.
Oil volumes have also been rising for a while now. In fact, India saw the largest volume growth globally according to the International Energy Agency, which in its latest monthly oil report released on May 12 said that with demand at 4.4 million barrels a day in the first quarter, India is the world’s fourth biggest oil consumer behind US, China and Japan.
Over the last couple of months, cement sales perked up, too, backed by higher off take in certain states such as Andhra and Telangana, road freight rates have firmed up, and even power demand growth has remained steady.
But some analysts are not convinced these green shoots point to a broad-based recovery.
“Diesel demand may be up because of substitution, from rail to road traffic,” says Sajjid Chinoy, Chief India Economist at JP Morgan. Broad macro numbers on trade, industrial output and PMI, over the last three weeks, do not point to a recovery, he says. “In fact, data suggests the economy is losing momentum.”
Indeed, the industrial production (IIP) data released on May 12 shows capital goods output declined 15.38% in March. For full year 2015-16, it declined 2.9%. Consumer goods output remained flat in March, while for the full year it rose marginally 3%. Further, imports of capital goods and consumer goods both contracted, indicating that domestic demand momentum may be slowing, Chinoy said.
The quantum of non-oil, non-gold import compression was alarmingly large, he says. “In April, it contracted 10.2% sequentially (month-on-month, seasonally adjusted) on the back of a 9.8% contraction in March. Manufacturing imports contracted 14.9% in April, capital goods 20.1% and consumer goods 15.3% (all month-on-month, seasonally adjusted). These reflect weak domestic demand and growth conditions,” he says. JP Morgan uses standard techniques used globally to arrive at seasonally adjusted data. The government does not provide seasonally adjusted data.
Chinoy, however, adds that any slowing of growth should not be a surprise or a source of panic. “It, likely, simply reflects the positive terms of trade shock from lower oil prices beginning to roll off,” he said. Munjal of Hero Motors, too, says that the green shoots are only early signs. “Growth is not secular yet. Private investment must pick for sustained growth,” he says.
Some analysts acknowledge the inherent pockets of weaknesses — agriculture, private sector capital expenditure and banking, but are bullish that the green shoots point to strong growth.
“All high frequency indicators make us believe economy is picking momentum,” said Neelkanth Mishra, India Equity Strategist, Credit Suisse. An interesting factoid, he said, was the divergence in the growth in currency in circulation and deposits after having remained flat since 2009. “Few times this happened in the past, the economy has thrived thereafter,” he points out.
The traditional growth drivers are consumption, investment, public expenditure and exports, says Ajit Ranade, Chief Economist, Aditya Birla Group. With exports declining for 17 straight months, almost absent private investment, it is public expenditure and consumption demand that has helped the economy. “Consumer spending is holding steady; it’s fine in urban India. But rural wages are growing at 0.1 per cent. If monsoon is good, we can have a bumper Diwali,” he says.
“Consumption demand is the bulwark of the Indian economy, accounting for 55% of the GDP,” notes DK Joshi, Chief Economist in rating agency Crisil. But two successive years of drought has stifled rural demand. “About 47% of GDP comes from rural India. And rural India contributes 54% to consumption demand,” he points out.
For the auto industry, sales in rural India may be starting to shift gears, but rural demand is still largely weak for Hindustan Unilever Limited, the country’s largest FMCG company. “Whatever growth we have seen in soaps and detergents in rural India is due to larger coverage of villages, price cuts, and placing more products with retailers,” says a senior HUL executive. Soaps and detergents account for roughly half of HUL’s total sales, and FMCG sales also are a leading indicator of the economy.
Some other FMCG companies, such as Dabur India, are seeing some positive signs, but hope normal rains will boost sentiment and lift sales in the second and third quarter this year. “Last year, we witnessed a sharp slowdown in the rural market. It is starting to show some positive signs but I will wait for a few more months,” said Lalit Malik, Chief Financial Officer, Dabur India.
For CavinKare, another FMCG company dominant in southern India, sales have remained steady. “We are growing well in rural and urban India,” said CK Ranganathan, Chairman, CavinKare, which sells personal care products such as shampoos (Meera, Chic) and fairness creams.
