After last Friday's underwhelming GDP number - when 2012-13 ended with 5 percent growth, a decade's low - the big question is whether the worst is over, or more pain lies ahead. Were the markets, which are supposed to discount the future rather than be bamboozled by the past, right to send the indices crashing?
Since last Friday, there has, in fact, been a cascade of more bad news. The rupee has been heading south, and is now targeting 57 to the dollar. The HSBC Manufacturing Purchasing Managers' Index (PMI) is at a 50-month low. Corporate revenue growth in the fourth quarter of 2012-13 hit a three-year low, reports Business Standard, and the trend is still downwards. Business confidence is low.
The government, which has been painting optimistic scenarios of a turnaround that have failed to materialise, now has no option but to acknowledge that any reversal of fortunes will be painful and slow. Today's Economic Times has Chief Economic Advisor Raghuram Rajan admitting that the last GDP number was disappointing. "It is not a number that we are satisfied with. We have to continue persevering at increasing the growth rate and we intend to do so. And over time, the measures that have already been taken will also start creeping in, which will increase the rate of growth."
The message for politicians in the Congress is chilling: there is no economic uptick coming before 2014.
While it can be nobody's argument that the tide will not turn at some point, Rajan is probably still being overly optimistic and gave three reasons for his still lingering optimism: a better rabi crop, higher government spending, and a strong finance, real estate and insurance sector.
He is surely wrong in his assessment - except for government spending, which has been held back till now, but could be turned on as elections approach. The rabi crop is nowhere near what was projected earlier, with annual wheat production now seen to be well below previous projections of nearly 95 million tonnes for the year. As for the strong finance, real estate and insurance sectors, real estate has hit a brick wall, insurance is stuck with low growth, and banking is saddled with excess bad loans and further prudential requirements.
In any case, the government's actions betray panic rather than confidence in a turnaround. Confronted with a sudden surge in gold imports, the Reserve Bank is trying to stamp it out by curbing bulk imports. Short of tax resources, the government is trying to wangle some kind of agreement with Vodafone to settle its tax case through compromise.
It is thus difficult to believe that the Indian economy is anywhere near a real takeoff - assuming one discounts the short-term buoyancy that will accompany election-eve spending. Consider the negatives:
#1: The rupee is the first stumble. Now heading for 57 against the US dollar, its value will ultimately depend on capital inflows driven by what the US Fed does. If the Fed starts slowing down on its bond purchases, flows could dwindle. Currency traders expect the rupee to touch 60 by the year-end. If and when this happens, we are going to be importing inflation even as domestic growth slows down further. A stronger US economy means a stronger dollar - and a weaker rupee. This is good for exports, but the rebound will come with a lag.
#2: The government's fiscal deficit is nowhere near what it is claimed to be. The official numbers show that the deficit in 2012-13 was 4.9 percent, aided by spending cuts - far lower than what was indicated in the February budget. This is being touted as a triumph of prudent fiscal management, but it is nothing of the sort.
Two points are worth noting. A sharply lower fiscal deficit means the government has exceeded its spending cut targets, which may mean ministries are unable to spend. This is negative for growth, but not inflation. The second thing is that the actual fiscal deficit may be higher, but is going unreported. For example, the oil subsidies pertaining to last year - around Rs 45,000 crore - were paid only this year due to the government's cash-based system of accounting. Add the Rs 45,000 crore back to the fiscal deficit, and the figures will probably be higher than budgeted. Not what the FIIs are waiting to hear. Little wonder, S&P is not in any rush to upgrade India's rating.
#3: The government is sending signals of election-eve desperation - which is again negative for economic perceptions. The recent effort to push through a ruinous Food Security Bill is one such signal. The decision to speed up the direct cash transfers (DCT) scheme without adequate preparation is another. The Food Bill, if implemented quickly, will ratchet up government spending and the fiscal deficit. The DCT, if expanded quickly, will be mildly depressive of demand. Remember, the aim of DCT is to cut out ineligible or fake beneficiaries - which means less leakage from the system. This means money will remain with the government - which will depress consumer demand. Leakages are nothing but money siphoned off by the corrupt, but unless the money is stashed away in Swiss banks, it returns as consumer demand. If it is reduced or gone, demand will taper off, however efficient it will make the system for the future.
#4: The government has banks to bail out with infusions of cash. The public sector banks are stuck with huge bad loans. The Reserve Bank has recently said that banks should set aside 5 percent against bad loans that are restructured by 2016 - from the current 2.75 percent (in stages). Rating agency ICRA said in a report last week: "There could be a steep increase in the reported NPA (non-performing assets) percentage from 3.3 percent as on March 2013 to as high as 5.5-6.5 percent in June 30, 2015."
This means two things: government banks will need more capital if they have to lend more; and they will lend less to troubled promoters to avoid having to take bigger hits on their profits.
If government has to provide more capital, it means a higher fiscal deficit. If it does not, banks will restructure fewer loans to protect their profits - which means more bankruptcies and a slowdown in lending and growth in some sectors.
#5: Interest rates are not going to be too helpful in pushing growth. Reason: when banks have to worry about bad loans, they will be in no hurry to pass on any rate cuts. But even the RBI will not be keen to rush its rate cuts because its big worry is the current account deficit - which could be around $ 100 billion this year. Without a healthy real rate differential between US and India, dollar flows could be skittish. As Rajeev Malik, Senior Economist at CLSA in Singapore, observes, the "RBI is likely to be more focused on INR (rupee) and financial stability than growth/WPI inflation."
#6: The monsoon factor will be key. Though our weatherman (the IMD) has forecast a normal monsoon, he is not known for accuracy. Two others, the Japanese Research Institute for Global Climate and the private Skymet Weather Services have forecast a deficient monsoon - possibly in the middle months of July and August. The Economic Times quotes Jatin Singh of Skymet as saying that "north India will be severely affected in July. There is a negative evolving Indian Ocean Dipole near Indonesia. It can potentially create a scenario that will pull moisture from the Arabian sea and the Bay of Bengal towards the east Indian ocean and weaken monsoon over India."
The importance of the monsoon cannot be overstated in a scenario where food procurement is going to assume overwhelming importance after the passage of the Food Security Bill. Goodbye monsoon, goodbye food security.
#7: Corporate results may not have bottomed out as yet. According to Business Standard, "revenue growth (in the fourth quarter, January-March 2013) slumped to a three-year low and the fall in net profit was sharper than in the previous quarter." The 1,900 non-oil, non-bank companies saw sales grow at 4.4 percent - far below the rate of inflation. Which means there's been a fall in sales volumes and capacity utilisation.
A Motilal Oswal study of the companies tracked by the brokerage firm confirms the slowdown. It says aggregate sales grew by 6.9 percent (against 8.3 percent estimated), while profit after tax remained flat.
It is unlikely that corporate India is going to invest when sales are under pressure and profits flat or negative.
#8: The outlook is still not positive. The HSBC Composite PMI, which includes both manufacturing and services, edged up by 0.4 to 51.5 percent. This shows that services are holding up growth while manufacturing is down in the dumps. But this bright spot is more apparent than real. As CLSA notes, the average "composite PMI level for April-May is 2.1 points lower than the average in January-March. This suggests some sequential loss in momentum."
Commenting after the HSBC Manufacturing PMI yesterday, BNP Paribas' Chief Asia Economist, Richard Iley, called it a "ghastly survey, suggesting that India's tentative industrial recovery is not just fading but moving sharply into reverse. He added that hopes of a 6 percent growth this year "look forlorn", ET reported.
There is no growth nirvana for UPA in sight. This probably explains why Sonia Gandhi is clutching at the Food Security straw as though it is a life-saver.
Updated Date: Dec 20, 2014 19:12 PM