The latest set of economic numbers released this week sends across mixed signals about the health of the economy. Core sector growth, which measures the output of eight major infrastructure sectors of the economy, went into negative territory for the first time in over four years in August as five out of the eight sectors constituting the index shrank in size. Overall growth in these sectors dropped to -0.5% in August in contrast to the same month last year when core sector growth stood at a much stronger 4.7% and July this year when it was 2.7%. The coal sector witnessed the worst fall, contracting 8.7% year-over-year in August, while steel, fertilizer and refinery products saw positive growth. These dismal numbers suggest that the economy is still some distance away from posting a strong revival in growth and it may be too soon to predict a definite turnaround. However, other high-frequency data on the economy suggest that the worst might be over. Vehicle registrations have witnessed a strong comeback in September as discounts ahead of the upcoming festival season have managed to spur sales. Further, although car and tractor companies continue to witness a drop in sales compared to last year, their rate of contraction has begun to slow down. A return to the sales levels witnessed last year, however, will require a stronger rebound in the overall economy.
Other macroeconomic indicators that could potentially tie the hands of the government as it tries to tackle the slowdown have also shown signs of improvement. The government has limited its borrowing in the first half of the year to ₹4.42 lakh crore, which is in line with its initial borrowing plan in order to achieve the fiscal deficit target of 3.3% for the year. The current account deficit at the end of the first quarter of the current financial year has narrowed to 2%, from 2.3% at the end of Q1 last year, thanks to higher service sector exports. The result of the various stimulus plans that have been announced by Finance Minister Nirmala Sitharaman over the last few weeks and the Reserve Bank of India’s spree of rate cuts beginning in February will be seen over the next few months and quarters. It is doubtful, however, whether these reform measures, even if they manage to reverse the slowdown, will be enough to boost growth over the 8% mark anytime soon. The Economist Intelligence Unit, for instance, predicts GDP growth to be just over 5.2% this fiscal. The corporate tax cut last month was an important structural reform that could significantly boost animal spirits in the economy. More such reforms, however, will be needed to permanently lift India’s growth trajectory.
