The signs of further weakness in the Indian economy are emerging from every high-frequency data indicator. The Index of Industrial Production (IIP), a key barometer of economic activity, contracted for the second straight month in September by 4.3 percent. In August, the factory output had contracted by 1.4 percent (revised estimates). What has dragged the IIP this time? The mining sector contracted by 8.5 percent in the month, while the manufacturing sector shrunk by 3.9 percent. Capital goods, a key indicator of investment activity, slipped by 20. 7 percent in the month of September. The consumer durable output contracted by 9.9 percent. What do these numbers mean for the economy?
The slowdown across segments continues and is now entering the negative growth zone. Such a poor show in the IIP numbers isn’t a surprise because the core sector growth, the growth across eight major industries that contribute 40 percent of the IIP, had already indicated the trend. The July-September GDP figures are likely to be a bigger shocker than the April-June numbers that showed GDP growth at 5 percent, the slowest in 25-quarters.
The numbers are a major wake-up call and a reminder to the government and the Reserve Bank of India (RBI) that all isn’t well in the economy and urgent remedial measures are required to restart the growth engines.
Clearly, the measures announced targeting specific sectors so far aren’t up to the task. The economy is suffering on two fronts—lack of private investment and lack of domestic consumer demand. Without fresh private investment, one cannot hope that companies will show a willingness to take up fresh projects.
So far, the economy has been riding on government spending, but that cannot continue forever. The absence of domestic demand is hurting the economy, too. Unless the end-consumer resumes spending on goods and services, companies cannot revive falling businesses. The case of the auto sector and consumer goods segments are prime examples of the declining consumption pattern.
The government estimates Rs 100 lakh crore infrastructure investments over the next five years or an average Rs 20 lakh crore a year. This is a far cry from what is spent on infrastructure currently, which is barely one-third of what is estimated. The question is: Where will this money come from? India does not have powerful institutions that can fund long-gestation infrastructure projects. Banks do not have enough long-term liabilities to match such loans. Lenders have gone terribly wrong in the past by not following healthy lending practices.
About 70 percent of the banking system (read state-run banks) are at the mercy of the government for capital for its survival. India does not have a deep bond market to take up the financing burden. The state-insurer Life Insurance Corporation of India (LIC) has been overexploited to do businesses it has never understood. There aren't many other options left to take up the infra-funding burden. The government's plan to borrow off-budget is risky and unadvisable. The question that comes up again is, who will fund the multi-billion infra dream.
The second major drag is the government's excessive involvement in businesses. The government remains a majority, active participant in several entities including banks, airlines, infrastructure firms. It controls 70 percent of the banking industry. This participation has resulted in a lot of money getting stuck in these entities. The government will have to exit these businesses backed by a solid, aggressive disinvestment plan to unlock this money.
The third is the depressing pace in carrying out land and labour reforms. This has been a major turn-off for investors looking at setting shop in the country. Nirmala Sitharaman's Budget talks about narrowing labour laws. This is a step in the right direction but quick execution is important. Since land is a state subject, respective state governments need to work with the Centre to bring about change. In the past, investors got a shocker from episodes such as Singur. These kinds of incidents cannot be allowed to be repeated if India wants to progress economically.
Fourth, the government will have to also need to work out an exigency plan to get private investors back. This is even more critical now since domestic consumption is dropping to dangerous levels. According to a CMIE report, investment in new projects plunged to a 15-year low in the quarter ending June 2019. Both private and public sectors announced new projects worth Rs 43,400 crore in June 2019 quarter, 81 percent lower than what was announced in the March quarter and 87 percent lower than during the same period a year ago.
According to the finance ministry’s data, projects worth almost Rs 11 lakh crore remain ‘stalled’ or are having issues. Railways, roads, and power sectors account for more than half of these stalled projects.
The economy is giving back-to-back signals of persisting weakness. What is needed is a dedicated, solid action plan addressing all aspects of the economy. Time for baby steps is over. Unless private money comes in, the economy cannot flourish to become a $5 trillion economy as envisaged by Prime Minister Narendra Modi. The ball is in the government’s court after successive rate cuts by the monetary policy authority. Reviving demand will require out-of-the-box steps to put more money into the hands of people. The question is: Where will the government find money for a stimulus at a point when it is already doing a tight rope walk on fiscal math.
(Data support by Kishor Kadam)
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Updated Date: Nov 12, 2019 11:54:30 IST