All data points indicate that there is a distinct slowdown in the economy. The negative growth rate in the core sector at 5.2% in September is the lowest since the new index came into being, which is a setback as it indicates that infra is faltering. The government has been the main driver of infra and the fact that it has turned negative is worrying. While it is true that the extended monsoon has come in the way of this sector, the fiscal pressures on the government could cause some cutback by the end of the year. The RBI has lowered the forecast for the year to 6.1% and other agencies are looking at a number less than 6% which is psychologically disturbing.
Are there any signs of a revival? There have been two developments which are very positive but also carry riders. The first is a good monsoon and expected kharif crop which carries good news for the industrial sector as the fortunes of the rural economy are linked to these prospects. The Ministry of Agriculture expects a good crop this time across most commodities which can ignite a revival. However, a lot also depends on how prices move and this where is there is a conundrum. A good crop normally means a decline in prices as excess supply comes into play. This in turn means that incomes of farmers do not increase substantially unless there is a large increase in output. Therefore there is no assurance on the rural demand story as yet. In fact even the increase in MSP for both the kharif and rabi crops this year has been quite subdued.
The second bit of good news is the success of the online sales of e-commerce companies this time. Both Flipkart and Amazon along with Snapdeal have reported large increase in sales. The timing has been right with the festival season and what is significant is that these companies have argued that their sales have come from the Tier 2 towns which show both penetration and more widespread consumption. However, the rider here is that often it has been seen that high pace of online sales substitutes or cannibalizes those of brick and mortar shops. It needs to be seen if this happens this time too.
These two phenomena are important as they would provide a picture on how consumption is faring and whether there is any turnaround. Other indicators like corporate performance and employment are still ambiguous with no clear picture on whether spending power has been created. The average capacity utilisation rate for industry has come down again in June and this means that there is less incentive for further investment at this point of time. In case consumption does pick up over the next few months, this can change, leading to a revival in investment.
How can one then interpret the slew of measures that the government had announced over the last two months? Most of the measures announced were related to unclogging the system to ensure free flow of business with focus on housing and SMEs. The real big bang reform was the reduction in corporate tax rate. The estimate of revenue foregone was Rs 1.45 lakh crore, which if it materializes should mean additional resources with companies. While this push has been commendable it is not clear if the companies would actually invest these savings or have higher dividend payouts. This is a gamble taken by the government which will definitely help to spur investment in the medium term but may not yield results this year.
Therefore, a lot depends on how these incremental changes work their way through the economy. It looks unlikely that the government will contemplate any further changes in the individual or capital gains tax tables as the revenue loss will not be bearable. Already the concessions on the GST have had a negative impact on collections which tend to be volatile. Hence, the recovery path will be gradual and the important thing is that there should be no slippages from hereon. Two areas are of concern.
The first is the capex plan of the government which is critical in moving the economy. Even though a sum of Rs 3.3 crore is quite small to drive the economy, it cannot be compromised. The other is the state of inflation presently the CPI inflation number is just at 4% and food inflation has been the worry and crossed the 5% mark last month. There still seems to be no respite on this score. If it does start moving up, it can have an impact on the path of monetary policy. The RBI has taken an accommodative stance so far meaning thereby that there will be no increase in rates. But if inflation moves up sharply, there may have to be reconsideration. Given that growth is also weak right now, it will be a hard choice that has to be made.
The writer is chief economist, CARE Ratings. Views are personal.