It’s the real economy

It’s the real economy
Corrective steps are needed to recover momentum in industrial growth

Feel-good news about the economy, the rating upgrade from Moody’s and, prior to that, the jump in India’s position in the World Bank’s Ease of Doing Business index, has dominated the headlines. The improvements reflect the increased attractiveness of India to investors and deserve applause. Although it seems out of sync with the reality on the ground, the international recognition doesn’t hurt.

As seen from abroad

The ratings by Moody’s are based on its assessment of the trajectory of governments’ abilities to service their debt over time. The higher rating for India signals a lower risk grade for the government’s debt and can lower the cost of raising it. Other borrowings benchmarked to the government’s also stand to benefit. The significance of the upgrade is also in its timing. In 2015, Moody’s had changed the outlook for India from ‘stable’ to ‘positive’, while keeping the rating unchanged. That outlook would have been difficult to defend at the upcoming review a few weeks down the line, had the rating upgrade not materialised. India could have been pushed back into the ‘stable’ outlook grade.

The likelihood of revisions by other rating agencies such as Standard & Poor’s has increased, but those upgrades will not be automatic. To bag them, the National Democratic Alliance (NDA) government will have to preserve its fiscal rectitude and encourage States to shun populism and adventurism.

Not so optimistic

As far as the growth on the ground is concerned, the performance of the economy in the first half of the current financial year will be known next week. The release of growth estimates for the second quarter, ending September 30, is due at the end of this month. Exports data and the quick estimates, the Index of Industrial Production (IIP), for April through September are out. The bellwether indicator for non-agricultural production, investment and consumption in the economy does not present a pretty picture.

News on the industrial output is bad. The growth rate weakened to 2.5%; it was 5.8% a year ago. On the manufacturing front, the news gets worse. The growth rate was 1.9%, pale when compared to 6.1% a year ago. It’s the same story with infrastructure and construction: the growth rate, 2%, is feeble compared to 4.9% in the first half of last year.

Consumer and investor sentiments haven’t got any better. Capital goods and consumer durables output was lower in the first half of the year than that in the same period last year, as production contracted. The only source of comfort have been consumer non-durables, the output of which grew to 7.4%, although at a slower pace than the 10-plus% growth a year ago.

So, the IIP indicates that the industrial sector is on extremely shaky ground. Festive and post-harvest season spending was expected to boost demand, but September remained a weak month. The hope now is that October, data for which are not out yet, will turn out to be better. The investment climate remains soured. The conditions do not seem conducive for job creation.

The industrial performance this year so far is so tepid that it is weaker than it had been in 2012-13, the worst year growth-wise under the United Progressive Alliance (UPA) government. The GDP had grown at its slowest pace, 5.5%, that year in its 10-year tenure. The annual IIP growth had been 3.3%. It was 2.5% in the first six months of this year. Growth in every single major segment of the IIP — manufacturing, capital goods, consumer durables and infrastructure and construction — this year so far is weaker than it was in 2012-13. If corrective steps are not taken, at the current rate of loss in industrial growth momentum, this year may turn out to be worse than the UPA government’s policy paralysis phase.

The IIP’s coverage by design is limited to the organised sector. The disruption in the unorganised sector will be measured separately and become known only later. Just how much of a drag the industrial sector was on the economy’s overall growth remains to be seen. Other segments of the economy, agriculture and services particularly, are expected to outpace it.

On the export front

Exports had been showing encouraging signs of recovery, with double-digit growth. August and September were good months. But October notched up a small decline, so more data points are needed before it can be concluded that a sustainable recovery is under way. The decline is sharper in the employment-intensive sectors of leather, gems, jewellery, handicrafts, readymade apparel and carpets.

Exporters blame the break in the trend on a liquidity crunch owing to the infirmities in the goods and services tax (GST) system. They complain that their refund claims were not released for four months. Smaller firms with limited access to working capital have taken a body blow.

The growth crisis is of the NDA government’s own making. If demonetisation led to demand destruction, the GST rollout has had disastrous effects on the supply side. The twin shocks have compounded the problems of industry, big and small, that was already struggling with a slowdown. It’s time the real economy starts dominating the government’s agenda.