Too early and little data to indicate economic revival yet

The government has so far shied away from acknowledging that the economy is in the grip of a clear slowdown, with various ministers either sidestepping questions on falling Gross Domestic Product (GDP) growth rates or denying that there is any trouble with the economy at all.

Slowdown is not a word that the government wants to be seen uttering. This, despite GDP growth coming in at a nearly six-year low of 5% in the April-June quarter (Q1) of this fiscal and widespread decline in sales of products, from cars to biscuits and from rail freight to air passengers. So when finance minister Nirmala Sitharaman announced the third set of sectoral measures over the weekend to stimulate demand and also alongside stressed on the economy witnessing a “revival”, it was the turn of economists to shake their heads.

Sitharaman quoted figures on industrial output, inflation and fixed investments to assert that the economy was already in the revival mode.

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The FM showed data points to buttress her claims: a graph sourced from the World Economic Outlook (WEO) and the International Monetary Fund (IMF) showed inflation in India well below 4% for 2018 while that for emerging markets was nearer 5%. Although Consumer Price Index (CPI) inflation at 3.2% in August was significantly higher than that in the fourth quarter of the last fiscal at 2.5% but still considered reasonably low overall.

Also read: Ground reports of a downturn

There has been growth in industrial production since the last quarter of 2018-19, in Q1 of this quarter and in July. The FM also showed that quarter wise fixed investment as a percentage of GDP had risen sharply after an equally sharp dip in the immediate previous quarter.

So are green shoots already visible and is an economic revival already underway? DK Srivastava, Chief Economist at Ernst & Young, pointed out that a low inflation “cuts both ways”. He explained that when inflation is kept at a low level, it reduces nominal GDP growth, which in turn translates into lower growth in tax revenues, which are always in nominal terms. This leaves little room for government’s discretionary expenditure, particularly capital expenditure. Basically, low inflation reduces the scope for fiscal policy to stimulate the economy.

Also read: Retail inflation inches up to 10-month high of 3.21% in August

“The main positive news is only with respect to index of industrial production (IIP) and data for that too is available only for one month as of now. We can talk about revival when capacity utilisation increases across industries and there are signs of pickup in demand for consumer goods – both in consumer durables and Fast-Moving Consumer Goods (FMCG) goods,” he said.

Meanwhile, analysts at SBI Mutual Funds have quoted data from the CMIE Economic Outlook and their own research to say that slowdown has affected all segments of demand. “Consumption growth at 3.1% was at record low. Gross Fixed Capital Formation (GFCF) growth was only 4%, much lower than 2018 trend of +11% and exports’ demand nearly halved to 5.7%. Only government spending grew 8.8% but remains challenged. On the supply side, GVA growth softened to 4.9% y-o-y (vs. 5.7% in Q4 FY19). The slowdown in growth was led by softer industrial and service sector output”.

The analysts further said that high frequency activity indicators continue to show weakness in economic activity. They said:

1. There is a visible slowdown in consumption indicators (two-wheelers and car sales, FMCG products or sale of discretionary products). Both RBI’s consumer sentiment and future expectations have deteriorated, primarily attributable to deterioration in sentiments on the economic situation and employment. Consequently, domestic production and imports of consumer goods have moderated.

2. All investment related indicators (such as CV sales, import and production of capital goods) are showing signs of moderation.

3. While export growth improved in July, it is still a muted growth. In FY20 (till July), average exports growth is flat at 0% y-o-y vs. 15% growth seen during corresponding period last year – indicating weak global demand situation for Indian business.

4. On the supply side, while cumulative rainfall is running normal so far, large spatial and temporal distribution may have a negative bearing on crop yields. In addition, total kharif sowing is running lower than the last year.

5. Growth in industrial production has been weak since November 2018. Most of key sub-categories reported slower growth in June. Domestic auto sales continue to decline across the consumer and industrial verticals.

6. Service sector activity continues to present a mixed picture.

Also read: Automobile sector crisis deepens, vehicle sales hit 21-year low

Analysts at Kotak Mutual Funds emphasised on some more data points to underline the depth of the current slowdown. In a report, they pointed to outstanding stalled projects as a percentage of GDP – the percentage is highest since 2013 at well over 9%. There is a simultaneous decline in new project announcements, again the steepest decline since 2013. Kotak analysts also noted that India’s trade deficit with China is at “alarming levels” even as the finance minister highlighted India’s improving Current Account Deficit in her presentation this weekend.

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So will the series of measures the government has recently announced, for sectors including automobiles, MSMEs, banks, real estate and exporters mitigate the pain going forward? Analysts at Centrum Broking have pointed out that such measures along with the “on-going easing of financial conditions aided by significantly accommodative monetary policy support coupled with the relatively faster monetary policy transmission due to sustainability of surplus liquidity in the system should lead to growth recovery over H2 FY2020 (October 2019-March 2020). Despite the pickup in consumption and investment activity in H2FY2020, escalations in global trade wars and synchronized growth slowdown globally are most likely to weigh on our exports and thereby become a significant impediment in the considerable revival in GDP growth momentum.”

In the end, the data is either limited to a short period of time or doesn’t cover all important aspects of the economy to begin the celebrations just yet. The festive season may help raise demand for some products such as automobiles and packaged foods, but unless there is sustained growth, any talk of green shoots is just that – mere talk.

Also read: Eight core sectors’ growth slows to 2.1% in July