Core sector growth in negative zone for first time in 4 years: Economy is slowing, but here are four ways government can arrest slowdown

For the first time in more than four years, India’s core sector growth contracted (meaning the index slipped to negative zone) in the month of August at negative 0.5 percent. This index grew at 4.7 percent in the year-ago period.

What is core sector growth? This is the growth across eight key infrastructure sectors in the economy. These are electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilisers. The data comes monthly and comprise nearly 40 percent of the weight of the items included in the Index of Industrial Production (IIP). This means, if the core sector growth takes a hit, one can assume that the IIP figures will reflect that dip for that particular month. If the pattern continues for three consecutive months, GDP for the quarter is expected to be disappointing.

Now, what happened in August? There was a broad-based growth slowdown in August, particularly in the coal output that logged -8.6 percent degrowth. Similarly, crude oil (-5.4 percent), natural gas (-3.9 percent), cement (-4.9 percent) and electricity (-2.9 percent) contracted. Three outliers were refinery products that grew 2.6 percent, fertilizers 2.9 percent and steel 5 percent. The performance of these three sectors saved the index from a bigger fall.

What could be the explanation for such a poor show? The obvious reason is that the underlying activity in the real economy is yet to revive. According to rating agency, CARE, the negative growth does indicate stagnation in government infrastructure spending thereby meaning that the government’s effort to prop up investment has been limited of late. At a broader level, the numbers indicate that the economy is likely to repeat the June quarter GDP trend when the national income growth fell to 25 quarters low.

Separately, a different set of data release showed that India’s September manufacturing PMI remained weak and business confidence declined to the lowest level in 2.5 years.

But, not all hope is lost. There is a likelihood that there will be some revival in the consumer spending in the next two months on account of the festive season demand, which could offer some relief to the economy. Together with this, one needs to wait and watch whether the recent announcements made by the government prop up business activities. Of all the measures announced, the significant reduction in corporate tax cut is a promising move provided companies use this extra room to pass on to the end consumer, who holds the key for an economic turnaround. If companies choose otherwise, the massive corporate tax rate cut won’t be as beneficial to the economy as it ought to be. Similarly, the sops announced for affordable housing, if followed up with more measures to boost housing, can aid recovery. But given the kind of growth contraction in the economy, clearly, these measures aren’t enough. There are a few more things the government must do without delay.

1. Put more money in the hands of people: If households/consumers have an investable surplus, this can act as a big boost for the sale of goods and services, which has slowed down considerably. People would then go out and spend on services and goods. A meaningful cut in personal tax for the lower and middle-income group is a good step to start with. The government can also announce more tax benefits for housing and construction to stimulate demand.

2. Make sure banks pass on lower policy rates to the end consumer: This has been a major grey area till now. Banks have been playing smart thus avoiding a hit on their margins even when they offer pittance on deposits. Even after RBI/MPC cutting rates by over 110 basis points, banks have only passed on 30-40 bps to the consumer. Even the latest RBI tool—repo linked home loan products—has failed to make banks cut rates. Banks have simply adjusted the spread above the lower external benchmark rate leaving the borrower to continue to wait for cheaper loans.

3. Kickoff land and labour reforms: This is even more important now as the economy is staring at a prolonged slowdown phase. The 2019 Union Budget made an attempt to kickstart labour reforms by converging several archaic laws into a narrow range. Similar attempts have been done by past governments too, but without much success on account of poor follow-up measures. Similarly, land acquisition needs to be made simpler to attract potential businesses. Foreign roadshows and mega shopping festivals can’t take the economy far without preparing the ground with conducive policies. It is not what the global rankings tell us based on skewed samples, but the real experience of an entrepreneur on the ground that matters.

4. Lazy disinvestment juggernaut needs to be pushed hard on an urgent basis: The initial enthusiasm seems to have slowed down on disinvestment plan. Also, the government’s promise to exit from businesses still remains a promise mainly in the banking sector. The government’s recent announcement to merge several weak banks into a few won’t count as a major reform, but the outright sale of government stake to private investors will.

The signals emerging from the ground including from the latest core sector figures are major wake-up calls for policymakers about the state of the economy and a reminder that it must unlock available engines of growth. The government has lost the ability to step up spending as it is in a fiscal deadlock. As against a 17.5 percent target budgeted for the full year, the government could mop up only 4.7 percent more so far, with the direct tax kitty growing to Rs 5.50 lakh crore as of 17 September, up from Rs 5.25 lakh crore a year ago. On the other hand, the government has already used 78 percent of the fiscal deficit room by August itself.

Going ahead, this tight fiscal scenario will put more pressure on the government. On the one hand, it needs to deal with slowing revenues while on the other, expenditure pressure remains. For now, the government will have to give a miss to the 3.3 percent fiscal deficit target and focus on spending to get the economic momentum back. The August core sector flop show is a major reminder. Putting more money in the hands of people is the keyword.

(Data support from Kishor Kadam)