IIP contracts by 1.1% in August: Indian economy is waiting for a Santa to cheer it with bags full of money

  • The August IIP numbers was the lowest in seven years showing negative growth of 1.1%

  • With no demand from industries and fear of further build-up of NPAs, banks have been significantly reducing credit offtake to businesses

  • The Indian economy requires a major stimulus to recover from the present course beyond a corporate tax cut

Another quarter percentage point rate cut from the Reserve Bank of India/Monetary Policy Committee is guaranteed now after the dismal IIP numbers in the month of August. The question is whether the rate setting panel will wait till the next policy or go for an early call.

The August IIP numbers was the lowest in seven years showing negative growth of 1.1 percent; the slowdown this time is broad-based with manufacturing sector (negative 1.2 percent) and capital goods segments (negative 21 percent) leading the poor show. The significant fall in capital goods indicates the extremely weak state of investment activity.

 IIP contracts by 1.1% in August: Indian economy is waiting for a Santa to cheer it with bags full of money

Representational image. Reuters.

That apart all other major segments too posted dismal growth figures. Consumer durables contracted by 9.1 percent and infrastructure/construction sector contracted by 4.5 percent. Poor IIP numbers were expected post-August core sector number, but that too contracted for the first time in more than four years at negative 0.5 percent.

Since core sector contributes 40 percent of the weight of the items included in the IIP, the latter was bound to take a hit, but even then this fall was beyond expectations. It is fairly certain now that with real economic growth in the doldrums, GDP figures for the quarter too will come at a disappointing level.

To cut the technicalities, Indian economy is giving worrying signals from across sectors. The usual growth engines that should ideally drive growth—manufacturing, domestic demand, private investments—aren’t functioning well. The August figures are even more disappointing because this is the month just ahead of the festival season that should have shown some uptick in demand.

But the data we have so far in hand doesn’t indicate any revival. India’s passenger vehicle sales slumped 23.7 percent in September, the 11th straight month of decline. Car and auto component makers have cut thousands of jobs and halted some production as the industry grapples with various challenges amid a broader economic slowdown.

Consumer confidence has fallen to a six-year low in September as sentiment on the overall economic conditions and employment availability expectations remained negative among households, according to a survey conducted by the RBI.

The problem is that government spending which has basically supported growth for a long time is losing steam. The reason isn’t difficult to understand. Revenue collections aren’t good enough to fill the void. Collections from India’s nationwide goods and services tax (GST) fell to a 19-month low in September, while direct tax collection growth since the beginning of the current fiscal stands at 6 percent so far, below the required growth rate of 17 percent.

On the disinvestment front too, the show isn’t up to expectations. The government has managed only Rs 12,357 crore so far as against the targeted Rs 1.05 lakh crore. The government’s recently announced corporate tax cut would mean Rs 1.45 lakh crore revenue shortfall. If corporates don’t pass on this to customers by way of price cuts and ramp up investments, the exercise won’t benefit anyone except punters in the stock market.

With no demand from industries and fear of further build-up of NPAs, banks have been significantly reducing credit offtake to businesses. Loan flow to medium and small-sized companies has actually shrunk in the 12 months ending August 2019 (according to data available on the RBI website). Loan flow to medium-sized companies has registered a negative growth of 0.8 percent during this period while that to micro and small companies have shrunk by a negative 2.1 percent.

Large companies have, however, seen a loan growth of 5.1 percent against 1.6 percent in the 12 months period earlier.

What should the government/ RBI do in such a situation? Logically, the MPC will have to cut the policy rate further but without banks passing on the lower rates to customers, it won’t help much. The government needs to ensure proper monetary transmission, something the RBI has tried and failed in the past.

On the fiscal front, the government should take urgent steps to put more money in the hands of people. The personal income tax needs to be slashed without delay.

The Direct Tax Code (DTC) report that was submitted recently the Finance Ministry talks of a 5 percent tax rate to be applied to those with an income of Rs 2.5 lakh annually and up to Rs 5 lakhs, 10 percent for an income up to Rs 10 lakh, 20 percent up to Rs 20 lakh and 30 percent for income up to Rs 2 crore and 35 percent for those with income of above Rs 2 crore. Unless households have more money to spend, it is difficult to revive consumer demand.

Recently, Moody’s Investors services had forecast a 5.8 percent GDP growth for India for FY20, dishing out the most pessimistic prediction so far. Going by the latest IIP/core sector numbers, this figure doesn’t look too exaggerated. A slowing global economy poses further challenges for India to resolve its own growth puzzle. The Indian economy requires a major stimulus to recover from the present course beyond the corporate tax cut.

(Data support by Kishor Kadam)

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Updated Date: Oct 12, 2019 11:22:10 IST