A deeper dark

Higher central government spending may have provided some support in the second quarter.

On Monday, data from the National Statistics Office showed that industrial production contracted by 4.3 per cent in September — the lowest in the current series. Over the course of the entire second quarter, the index of industrial production (IIP) has contracted by 0.4 per cent, after growing by 3 per cent in the previous quarter. Of the 23 sub-sectors within manufacturing, 17 contracted in September, up from 15 in the previous month, suggesting that the contraction is deeper and more widespread. The worsening performance of the consumer durables as well as the non-durables segment, indicative of subdued household demand, has dashed hopes of restocking of inventories prior to the festive season. Equally worrying, the capital goods segment, which connotes investment demand, contracted by 16.8 per cent in the second quarter, indicating that investment activity continues to be depressed.

Higher central government spending may have provided some support in the second quarter. Data from the Controller General of Accounts shows that government spending, both revenue and capital, picked up pace significantly after the Union budget was presented in July. But this is unlikely to have been enough to offset the subdued performance of other sectors. With various high frequency indicators suggesting that economic activity has slowed down considerably over the past few months, growth may well come in below the psychological 5 per cent mark in the quarter ended September. Equally worrying, even the crutch of government spending will not be available in the coming quarters as with its own finances coming under pressure, transfers from the Reserve Bank of India can only partially offset the shortfall in both direct and indirect tax collections, and disinvestment receipts remain well below the budgeted target — cuts in government spending are likely going forward, further accentuating the slowdown. Reflecting this deteriorating economic situation, a few days ago, rating agency Moody’s changed its outlook on India’s rating from stable to negative, citing increased risks that the country’s economic growth will remain “materially lower than in the past.”

It is possible that towards the end of this year the headline growth numbers may pick up once the base effect kicks in. But this is a statistical illusion. It would be a mistake to construe this as a sign of a recovery. The government needs to address multiple issues plaguing the economy. Along with measures to boost long-term potential growth, comprehensive measures are needed to address the stress in specific sectors such as telecom, real estate and the financial system. Piecemeal solutions are unlikely to lead to sustainable growth.