Volume Growth of FMCG, Auto Cos at 5 year High

Leading listed consumer goods and automobile firms posted fastest volume growth in at least five years in the April-June quarter, thanks to a favourable base but also driven by improving consumer sentiment, especially in rural India.

Car market leader Maruti Suzuki posted its sharpest growth in five-and-a-half years, while in consumer goods, top placed Hindustan Unilever hit a six-year high. Dabur, Bajaj Auto and Marico grew the most in over five years. Volume sales show the number of products that consumers put in the shopping basket, indicating actual demand.

The favourable base effect was a result of goods and services tax. Sales slowed down for most of the companies ahead of the introduction of GST on July 1, 2017, as distributors and wholesalers didn’t take fresh stock due to uncertainties over rates. Later, lower tax on many consumer items, chiefly groceries, led to price cuts and drove up demand.

While industry executives attributed a host of other factors as well for the strong growth in the first quarter, analysts said the base effect was a crucial element and that they would wait a little more to come up with a conclusion on demand trend.

Nevertheless, the sentiment largely looked positive. These companies had posted double digit year-on-year volume expansion in the December quarter as well, mainly because of the low base after a demonetisation-induced dip in demand a year earlier. But the growth in the April-June period even outpaced that.

Analysts said the base will weigh in their comparison of corporate performance. The November 2016 demonetisation and the 2017 rollout of GST had upended consumption and stocking patterns, making it difficult for companies and analysts to establish clear trend lines despite healthy sales growth over the past two-three quarters.

Companies, however, are confident on sustained growth in demand. With prices dropping for household and personal care consumer goods after the introduction of GST in July 2017, and a further cut in rates in November, most companies are witnessing their overall revenue entirely driven by volumes. A good monsoon season last year after below-average rains in two consecutive years also helped boost demand in rural India.

Over the past decade, sales of branded daily-need products have increasingly relied on the vast rural hinterland, home to about 80 crore people whose purchasing behaviour depends on farm output. Annual monsoon rains that help irrigate India’s crops play a vital role in shaping buying patterns in Asia’s third-biggest economy.

Maruti Suzuki saw 25% volume growth during the recent quarter. New model launches and strong buying in the rural areas helped the local unit of Japan’s Suzuki Motor dispatch 4.58 lakh vehicles, the highest ever in its history.

The strong rural economy always had a direct co-relation with the country's two-wheeler segment, especially motorcycles. Bajaj Auto’s domestic sales registered their best growth in 32 quarters, thanks to strong demand for mass market motorcycles in rural areas.

Government beats target of free LPG to 5 cr homes

The government will complete the task of giving LPG connections free of cost to five crore poor households across 715 districts under the ‘Ujjwala’ programme, achieving the target originally set for one of PM Modi’s signature social schemes nearly eight months ahead of schedule.

Sources said Speaker Sumitra Mahajan is expected to hand over the ‘Ujjwala Connection No. 5 Crore’ to the selected beneficiary at a function in Parliament in the presence of oil minister Dharmendra Pradhan.

‘Ujjwala’ aims at bringing clean cooking fuel to poor households, identified according to the Socio-Economic Caste Consensus, and has proven to be one of the Modi government’s key platforms for political outreach. The scheme was launched on May 1, 2016, with a target of providing free LPG connections to five crore households by March 31, 2019.

Manufacturing Activity Eases in July

Manufacturing activity eased marginally in July after reaching a seven-month high in June following lower output growth and new orders, but demand continued to be strong.

The Nikkei India Manufacturing Purchasing Managers’ Index declined to 52.3 in July from 53.1in June. A reading of over 50 on this survey-based index indicates expansion, below that contraction.

The index is based on a survey conducted among purchasing executives of more than 400 companies. The survey cited anecdotal evidence pointing to favourable market conditions and strong demand from international markets for Indian goods.

Survey respondents said that steel and crude oil were among the key items whose prices increased but overall, input cost inflation eased from June.

The Reserve Bank of India raised key rates on Wednesday by 25 basis points, its’ second after the previous policy announcement in June.

Hardening of input price pressures was one of the eight risks to inflation that the bank highlighted on Wednesday, the others being — crude oil, volatility in global financial markets, minimum support price, households' inflation expectations, monsoon, fiscal slippage and revision of house rent allowance.

Looking ahead, Indian manufacturing companies held optimistic projections for output in the next 12 months. Expected improvements in demand, promotional activities and expansion plans were the key factors behind confidence.

The level of positive sentiment strengthened to a three-month high during July but some respondents expressed fears of a potential slowdown in the year ahead.

RBI hikes rate 2nd time in a row

Loans for individual and business borrowers will inch up in the coming months with the Reserve Bank of India’s monetary policy committee voting in favour of a 25 basis point rate hike. The RBI raised its repo rate to 6.5%—the second increase in two months after consumer inflation remained stubbornly above 4%— the target mandated by the Modi government.

This is the first time that the six-member MPC, since its constitution in 2016, has voted for hiking rates in two successive meetings. While the trigger for the RBI’s rate action is clearly inflation, the policy statement has been very positive on the economic front. The increase in rates could raise cost of borrowings for banks which, in turn, will increase their marginal cost of lending rate, which is reviewed every month.

The RBI has projected inflation at 4.8% in the second half of FY19 and 5% in the first quarter of FY20. The central bank has also retained a GDP forecast of 7.3-7.4% for the second half of FY19 and 7.5% for the first quarter of FY20.

“Various economic indicators suggest that economic activity has continued to be strong. The progress of the monsoon so far and a sharper than usual increase in minimum support price of kharif crops are expected to boost rural demand,” RBI governor Urjit Patel said.

He added that non-food credit has risen 13% this fiscal, investment activity remains firm and the output gap has almost vanished. While sounding a caution on oil prices, the RBI governor said that foreign direct investment inflows have improved even as portfolio outflows have slowed.

In the post-currency interaction, RBI deputy governor Viral Acharya warned that currency in circulation was rising, and could reduce liquidity in the banking system.

STA-1 status

US President Donald Trump’s decision to grant India the STA-1 trading status equivalent to American allies for procurement of military weapons is a big rebuff to China for blocking India’s entry into the Nuclear Suppliers Group.

In making this call, the US President has relaxed a key condition set by the Obama Administration that India would be eligible only after it had secured the membership of all four technology control regimes — the NSG, the Missile Technology Control Regime, the Wassenaar Arrangement and the Australia Group.

India became a member of three of these, except for NSG where China has continued to block a consensus. After an unsuccessful attempt at securing NSG membership in the last few months of the Obama Administration, India had asked US to reconsider its conditions.

New Delhi’s case was that by blocking India’s case at NSG, Beijing had also put on hold Indo-US cooperation on co-production of defence equipment as well as bilateral transfer of high-end technology. The STA-1 will make this easier.  Only two other Asian countries, Japan and South Korea, are in this category.

There are two US arms control lists. One, the International Traffic in Arms Regulations list, which comes under the State Department. The other is the Export Administration Regulation list controlled by the Commerce Department.

In 2013, the Obama administration moved a bunch of sensitive items from the ITAR to EAR list. The EAR was then recast to make military commerce easier. In this rejig, India fell in the category of Strategic Trade Authorisation -2 while America’s closest allies were placed in STA-1. The licensing requirements are qualitatively different in these two categories, which is where the challenge lay in steering the India case forward.

India was not an ally and wasn’t going to define itself as one either. So, a decision was made in the dying days of the Obama Administration to give India Major Defence Partner status. But for it to have full effect, the EAR had to be amended to insert MDP category in STA 1.

The US Congress simultaneously passed a legislation ascribing the MDP description in law. This was not really needed as all this is within the US administration’s remit. Officials would like to call this a parallel process that just converged in the end.

June 2018: Core Sector growth

Growth in the country’s crucial core sector rose to a seven-month high in June on the back of a robust output in cement, coal and refinery segments, pointing to strong growth in industrial production data to be released later this month.

Growth in the eight core sectors — spanning coal, crude oil, natural gas, refinery products, fertilizer, steel, cement and electricity — rose an annual 6.7% in June, faster than previous month’s upwardly revised 4.3% and higher than 1% expansion in the same period last year. Cumulative growth in the April-June period was 5.2% compared to 2.5% in the year earlier period.

The core sector accounts for nearly 41% of the index of industrial production and any strong output augurs well for the overall industrial output. The cement sector rose an annual 13.2% in June, faster than the 13.2% recorded in the previous month. Coal production grew 11.5% in June, slower than previous month’s 12.2%, while refinery products expanded 12%, faster than previous month’s 4.9% expansion.

Natural gas and crude oil were the laggards. Crude oil contracted 3.4% in June, while natural gas declined 2.7%.

Monsoon tracker

In July, Mumbai got drenched with 1,137 mm of rain, which is not only more than the average requirement for the month (840.7 mm), but also the second highest monthly rainfall for July since 2012. The maximum rainfall—864.5 mm—was recorded in the first 10 days of the month. Then, there was a lull. Since 2012, the highest July rainfall was recorded in the year 2014—1,468.5 mm. Last year, the city received 869.7 mm of rain in July.

However, monsoon across the country fell below expectations in July, which ended with a rain shortfall of 6%. With monsoon becoming inactive in central and south India, the all-India rainfall deficit grew in the past six days from 2% to 6%.

In Mumbai, weathermen expect monsoon to pick up again from August 6-7, with a low pressure area expected to form in the Bay of Bengal.

Uncertainty, however, continues over monsoon’s performance across the country in August and September. August is likely to begin with the monsoon in a weak phase, with the trough close to the Himalayas—it usually brings showers in the western Himalayan states and not much in the northern plains. Fears continue over an evolving El Nino, an abnormal warming the east equatorial Pacific waters that usually has negative spinoffs for the southwest monsoon.

Maharashtra, along with other places in central India, is set for moderately dry to severely dry conditions till August 22.

The India Meteorological Department provided this forecast based on the analysis of the extended range outlook of the standard precipitation index. The SPI, which measures drought based on rainfall received, has shown negative rainfall abnormalities over many parts of the state till August 22. The SPI is negative for drought and positive for wet conditions.

Pulak Guhathakurta, the head of the climate data management and services at IMD, Pune, said as per the SPI’s outlook, parts of Madhya Maharashtra, Konkan, Vidarbha and Marathwada, among other regions in central India like Telangana, Chhattishgarh, Odisha, and west India including parts of Gujarat may have moderately dry to severely dry conditions till August 22. The forecast showed that a portion of south Maharashtra may also experiemce extremely dry conditions.

The SPI inidicated wet conditions for none of the regions in Maharashtra.

IMD also monitors the incidence, spread, intensification and cessation of drought with the aridity anomaly index. As per aridity conditions monitored by IMD from July 23 to July 29, most of the northern, eastern and southeastern parts of Madhya Maharashtra, western and southern Marathwada, among other regions in the country, were hit by severe arid conditions.