Tepid industrial volume growth in first two months of Q1 is worrisome

Tepid industrial volume growth in first two months of the quarter doesn't augur well for industrial Gross Value Added growth in the first quarter of the current fiscal. Moreover, growth in the Index of Industrial Production slumped to a nine-month low of 1.2 per cent in May, which is lower than the 2.6 per cent in April and below the 6.3 per cent recorded in May last year.

The early onset of the monsoon was seen as a factor behind the contraction of the electricity and mining sectors. The electricity sector fell 5.8 per cent in May compared to 13.7 per cent growth in May last year, while the mining segment fell 0.1 per cent during the month.

Following the receipt of the higher-than-budgeted dividend from the Reserve Bank of India, the Government reported a sizeable fiscal surplus in May, which is sure to be a fleeting phenomenon, as expenditure picks up in the later months. This pulled down the fiscal deficit to just Rs 132 billion or 0.8 per cent of the current financial year’s budget estimate for the first two months of the current fiscal.

In the first two months of the current fiscal, tax revenues rose by 10 per cent, while non-tax revenues surged by 41.8 per cent on a yearly basis. While revenue expenditure increased by 9.4 per cent, capital expenditure went up by 54 per cent on last year's election-curtailed base.

Although the government’s capital expenditure surged by 54 per cent in April-May, this was on a low base, and the extent of the growth was somewhat lower at 32 per cent as compared to the levels seen in corresponding period a couple of years ago. Nevertheless, the capex amounted to a healthy 20 per cent of the current fiscal’s budget estimate, and the same can now contract by 1per cent in the remaining 10 months of the year and still meet the target.

Given the buffers on the receipts side, Icra believes that the Government could push up capex by Rs 0.8 trillion in the ongoing fiscal relative to the budget estimate, boosting the headline figure to nearly Rs 12.0 trillion from the year’s budget estimate of Rs 11.2 trillion and take the annual growth in the same to a healthy 14.2 per cent.

The IIP growth expectedly eased to a nine month low 1.2 per cent in May from 2.6 per cent in April, while printing lower than analysts’ forecast of 2.0 per cent for the month.

The early onset of the monsoon doused activity in mining and the demand for electricity, with both these sub-sectors of the IIP reporting a contraction in May, as per PHDCCI, amidst an anaemic growth of manufacturing.

Moreover, the underlying trends were uneven, with three of the use-based categories displaying a contraction, amidst a continued high 14.1 per cent expansion in capital goods, boosted by a low base.

EoM.