RBI, govt see 'green shoots' but economic revival still months away

The government has been talking about an impending economic revival for months now with little proof, as it continues to avoid any mention of a slowdown.

This is despite India’s GDP growth numbers coming in at record lows, quarter after quarter. The government’s own advance estimates for 2019-20 have pegged GDP growth at just 5%. This means the Indian economy will have grown at the slowest pace since the year of the Lehman crisis in 2008-09.

However, at 5% for the entire year, the estimate builds in a mild recovery in the October 2019-March 2020 period since the growth in the first six months had averaged 4.8%. The 5% estimate anyway shows the extent of the slowdown in the economy within just 12 months, since GDP growth had been measured at 6.8% in 2018-19.

The 5% growth estimate for FY20 is way below the government’s initial estimate at 7% and also beneath the RBI number which was 7.4%, to begin with. The Central Bank subsequently lowered growth numbers to reach the 5% mark last month. One will have to watch out now for how close this 5% number is, to actual growth. In at least two of the last five fiscal years, the advance GDP growth estimate put out by the government has been lowered further. One economist called the 5% growth number the government’s “first guess”.

Also read: Economy not in trouble; green shoots visible, argues Sitharaman

The Reserve Bank of India (RBI) has thrown some light on this pessimistic growth scenario. In its latest monetary policy statement this month, the RBI spoke of revival already visible in the economy, citing high-frequency indicators. Has the slowdown really bottomed out?

The RBI had particularly mentioned tractor sales (up 2.4% in December after ten months of decline); domestic air passenger traffic growing in double digits in November followed by modest growth in December; accelerating growth in three-wheeler sales and railway freight traffic; and a turnaround in port traffic in December. Growth in factory activity (IIP) turned positive at 1.8% in November 2019 after contracting by -4% in October. The RBI had also said that the PMI services index improved to 55.5 in January 2020 from 52.7 in November 2019, boosted by a rise in new business and output.

Outside of the RBI hurrah, a few other factors also seem to be positive indicators. Prices of cement have risen in some markets in January and this has prompted infrastructure experts to indicate recovery.

▫️◻◼ Cement is possibly one of the best trackers for signs of an
upturn in construction and infra sectors . So its instructive to note that cement prices have risen 6% year-on- year in January and 4% month-on-month. Green shoots ?? ?

— Vinayak Chatterjee (@Infra_VinayakCh) February 10, 2020

Vinayak Chatterjee, Chairman at Feedback Infra Group, noted that “Cement is possibly one of the best trackers for signs of an upturn in construction and infra sectors. So it is instructive to note that cement prices have risen 6% year-on-year in January and 4% month-on-month. Green shoots??”

Also, an analysis by brokerage Emkay shows that at an aggregate level, the top line across companies in a few sectors has remained flat in the December quarter. This shows continued weakness, of course, but is significantly also a pause in the declining trajectory of previous quarters. In other words, while growth has not returned in sales for companies in some sectors, the previous month-on-month decline has been arrested in December.

“A disaggregated analysis shows a broader recovery: Q2 (July-September 2019) had nearly 2/3rd of these companies report a deceleration in sales growth; now nearly half of the stocks reported an acceleration in top-line growth trends. The improvement in top-line trajectory was very evident across agri-chem, auto, power and retail. On the other hand, pharmaceutical, media and speciality chemicals saw most companies report a weakening in top-line trajectory,” the Emkay analysts have noted.

Also read: Nothing in Union Budget 2020 assures revival of growth: Chidambaram

Meanwhile, IHS Markit has shown in its latest analysis that India’s services sector began the new calendar year on a strong footing, “with surging demand underpinning the fastest increases in new orders and output for seven years. As a result, job creation was sustained and business optimism maintained. The uptick in growth was accompanied by an intensification of inflationary pressures, with input costs rising to the greatest extent since February 2013 and output charge inflation picking up to a near two-year high.”

Rising from 53.3 in December to 55.5 in January, the IHS Markit India Services Business Activity Index signaled the strongest upturn in output for seven years. The rebound largely stemmed from favourable market conditions and better underlying demand. New work intake also expanded to its highest in seven years, with service providers mentioning a positive outcome from marketing efforts.

The Economic Outlook Survey of FICCI has referred to economists who broadly agreed that the GDP growth slowdown has nearly “bottomed out” even though growth is likely to remain subdued in Q3 2019-20 (December quarter). Participants cautioned that despite the promising numbers, a sustained economic recovery will take time – anything between two to six quarters.

“Participating economists cited various reasons, including a higher amount of projects sanctioned by financial institutions, greater deployment of funds in fixed assets by corporates, increase in government capital expenditure and higher payouts to support rural income schemes for their optimism about the rebound in India’s growth,” the FICCI survey said.

So can India finally shrug off deep worries over the prolonged economic downturn and relax? Not yet. Madan Sabnavis, Chief Economist at CARE Ratings, said, “A single month PMI number increase cannot be taken as being indicative of economic revival. We should at least wait for data for three months”.

He added that the Indian economy has been suffering from a demand problem and while the government and the RBI have taken several measures to boost growth, they have only addressed supply-side issues. “The demand side (of the economy) has to be addressed by the private sector but this will take time,” Sabnavis said.

So while the RBI and the government are right to point towards high-frequency indicators and infer that there is a revival in the economy, it may at best be a “troughing out” of the slowdown and that too, only across select sectors. Any sustained revival can be seen only after a few quarters.