The government is understandably preening over India having moved up 23 places to rank 77th in the World Bank’s Doing Business rankings of the World Bank. Unfortunately, the sheen of this undoubtedly creditable achievement--as well as India being among the top ten improvers--has been overshadowed by the nasty spat between the central bank and the government. Any such confrontation is undesirable at the best of times but is more unfortunate given the timing.
The economy – admittedly nowhere near the low point of the 2011 to 2013 period – is not quite in the pink of health. This is the time when all agencies involved in economic management should be seen as being on the same page, even if they are not. And even if a patch up does happen, the public quarrel will further dent an already subdued business and investor confidence. Because there’s no getting away from the fact that there is a sense of drift in the economy. How real is this?
The economy presents a mixed picture as of now. The 8.2 percent growth logged in the first quarter (April-June)-–the highest in two years – is undoubtedly a bright spot. It shows that the economy has started to shrug off the negative effects of demonetisation and the inevitable initial pain of the introduction of the goods and services tax (GST). Direct tax collections in the first six months have grown 16.9 percent, and advance corporate tax collections have also increased by around the same level. There is, however, some worry on the indirect tax front. Retail inflation may be inching up, but is still not worrying.
The manufacturing purchasing managers index (PMI) is moving up – the Nikkei India Manufacturing PMI has remained above the benchmark of 50 through 2018 and increased in September over August.
The new orders index also moved up in September. Lending by banks is up – latest figures from the Reserve Bank of India (RBI) show credit growth of 14 percent against 7 percent last year; how much of this is because of banks stepping into the space vacated by the crisis-ridden non banking finance companies (NBFCs) remains to be seen; this would mean that overall lending isn’t seeing a huge increase.
But these bright spots (many of which have caveats) are overshadowed by some very real clouds on the horizon. And it’s not just rising oil prices and the weakening rupee (the current account deficit is increasing, but at 2.4 percent in the first quarter of the current fiscal, it is a tad lower than the 2.5 percent of Q1 last fiscal). “Momentum has been evident, but sluggishness is creeping in,” says D. K. Joshi, chief economist, Crisil.
Indeed. The RBI’s quarterly consumer confidence survey for June-September 2018 shows a dip in the current situation index, with a rise in pessimism relating to the economic situation, employment and prices.
Anecdotal evidence seems to be bearing this out. There’s still a week for the festive season to draw to a close and while the shoppers are out in the markets, the shopping frenzy that marks this time of the year is missing. Sales of cars and many consumer durables are subdued, if not down from last year, and even this is because of deep discounts being offered. An Edelweiss Securities research report also finds this to be the case – malls and markets are dolled up, but footfalls are low. It, however, noted that this could be because shoppers prefer online shopping; it quotes Amazon as claiming that the response to its annual Great Indian Festival was far more than last year.
Sunil Sinha, principal economist, India Ratings, is worried that the crisis in the NBFC sector could hurt demand for consumer durables and vehicles – NBFCs were the biggest source of lending for these. YES Global Institute’s latest India Chartbook also flags this issue, pointing particularly to the commercial vehicle segment.
Any significant dip in consumer demand can jeopardise the much-needed investment recovery. Worryingly, the capacity utilisation story is a bit patchy. After jumping to 74.1 percent in October-December 2017 and 75.2 percent in January- March 2018, there has been a dip to 73.8 percent in April-June 2018. Besides, the investment rate in Q1 dropped to 28.8 percent from 29.1 percent in Q4 of 2017-18.
Fresh investments are not happening at the pace at which the economy needs. CMIE’s quarterly capital expenditure data show that the value of new projects was down to Rs 1.86 lakh crore in the quarter ended September from Rs 2.68 lakh crore in the quarter ending June and Rs 3.65 million in the quarter ending March. Fortunately, the value of revived projects has gone up to Rs 55,000 crore in the quarter ending September from Rs 4,000 crore in the quarter ended June.
A question that needs asking at this point is, if companies are ready to start investing in fresh capacities or expanding existing ones, will they have ready access to finance?
Sunil S Bhandare, economist, is hopeful that the resolutions under the insolvency framework could see more liquidity with lenders. Sinha is not so sure about this, pointing out that banks are taking significant haircuts. The prompt corrective action (PCA) framework of the RBI was further constraining liquidity and it remains to be seen how the tussle between the government and RBI plays out. If the RBI blinks and dilutes the PCA framework, that could lead to another set of problems in the near future.
The government has tried to address the growing current account deficit by hiking import duties on a number of goods (the consequent price rise of which is adding to the sluggish consumer demand). But the outflow of capital ($8.1 billion in Q1 of the current fiscal against an inflow of $12.5 billion in Q1 of the previous fiscal) is adding to the pressure as is the sluggish performance on the exports front. What this shows is the increased exposure of the Indian economy to global developments and the fact that India is not adequately prepared to deal with this.
Sure, things are not as bad as they were in the last years of the previous government. But they’re not very good either. As Sinha succinctly puts it: “You can argue about the glass being half empty or half full, but the point is it is still stuck at half.” So long as the government accepts this and gets its act together, that’s fine. If not, then there’s no stopping the economy from sliding further.
(The writer is a senior journalist and author. She tweets at @soorpanakha)
Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to Firstpost.com/Whatsapp and hit the Subscribe button.
Updated Date: Nov 01, 2018 13:56:04 IST