Financial Scene C.R.L. Narasimhan

On a recovery path

"The RBI’s inflation target of 6 per cent in January 2016 looks very much achievable."  

Any discussion on the state of the economy cannot ignore the political stalemate. The continuing parliamentary logjam does not reflect well on our political elite. There has been no major move forward on the goods and services tax (GST) bill. A special session of Parliament is planned. The government has had to seek compromise on the land acquisition bill but even then could not get the legislation through. Labour reform remains in the backseat. The government has been willing to go that extra mile but even then could not make any progress. Legislative paralysis affects governance and spoils the ruling alliance’s record of pushing through with reforms. The overall loss however is that of the economy. The logjam continues at a time the economy is seen moving forward in some areas but faces problems in some others. It would be interesting to see whether the positives outnumber the negatives.

Perceptions naturally count. Two recent surveys conducted by industry-level associations indicate a turnaround on the economy. Such survey results can be fickle. There can be question marks over the size and nature of samples but none of these should detract from the fact that after a long time, there is a ray of optimism among leading businessmen. The big question, however, is whether or how soon their hopes will materialise. Buttressing the government’s case are the two closely-watched monthly data releases — the industrial output (IIP) figures and the consumer price index (CPI). Industrial output figures for July reinforce the positive sentiment. The IIP rose 3.8 per cent, which seems to indicate a steady recovery. Manufacturing, which constitutes 75 per cent of the IIP, grew by 4.6 per cent year-on-year.

Consumer inflation fell sharply from 5.4 per cent in June to 3.78 per cent in July. The fall in food inflation has been even more striking during the period — from 5.48 per cent to 2.15 per cent. The actual figures are well below market forecasts.

Contrary to predictions of sub-normal monsoons, rainfall has been by and large satisfactory in most parts of the country. A decent harvest during the second-half of the year can further dampen inflation expectations. The RBI’s inflation target of 6 per cent in January 2016 looks very much achievable. In a benign environment, an interest rate cut is eminently possible. The biggest factor aiding positive sentiment is the low petroleum prices. These along with a fall in the prices of other commodities have lowered India’s import bill, contributed to low inflation and helped in narrowing down the current account deficit.

Mixed messages

Corporate results are as usual mixed but there are some very positive trends. Automobile and ancillaries have posted impressive gains in their sales. To a large extent, the rebound in automobile sales might be a sign of demand revival. Home loans are up, and this again indicates a return of confidence among the middle class. However, barring those bright spots, an analysis of corporate results shows a high level of stagnation both in sales and profitability. Cement industry shows no signs of recovery, and this does not augur well for the construction sector. Steel industry is in a state of near collapse.

So, what does one make of these mixed economic trends? The usual complications exist. What would appear to be a positive has a negative connotation as well and vice versa. Take imports, for instance. The fall in imports due to a sharp reduction in petroleum and other commodity prices is no doubt a prime factor. Yet, a fall in imports by itself need not be a healthy sign. For imports also include raw materials, semi-finished goods and the like that are consumed within India. A fall in the imports often notes a weakness in the ongoing recovery. It is myopic to claim credit for a narrower trade balance on the basis of falling imports.

India’s recent export performance has not been impressive, to say the least. A global slowdown has caused a fall in exports (it has also caused a fall in global oil prices). For three quarters in a row, exports have dropped.

Merchandise exports have fallen over seven successive months partly because of the drop in the prices of exported petro-products. But there has been a fall both in the volume and value of leather, textiles gems and jewellery. China’s surprise devaluation of the yuan against the dollar is another major cause for worry. China’s exports become more competitive, and there is a clamour for a sharp depreciation in the external value of the rupee as well. This might happen or not — the RBI has many other objectives as well — but there will definitely be an informed debate on India’s exchange rate policies in relation to those of its competitors.

From the side of financial disintermediation, bank credit to industry has fallen to very low levels partly due the slackness and partly due to the fact that some corporates have become adept at raising funds through other sources such as commercial paper and corporate bonds. On the clamour for lower interest rates, the RBI has pointed out that even after a 75 basis points cut in the repo rate, commercial lending rates have not fallen in tandem. There are always two sides to an economic issue. But at the moment the positives have an upper hand.

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Printable version | Dec 3, 2021 10:02:12 PM |

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