17 December 2014

Is the economic recovery in trouble?


India fares much worse than most major economies on important parameters Livemint i

Jayachandran/Mint Are the green shoots of economic recovery turning brown? A string of economic data released over the past two weeks provides several reasons for worry. Consider the following: 

1. Industrial output contracted in October at a rate not seen in three years. The collapse in the production of consumer goods in a festive month could be an indication that consumer demand in India is rapidly weakening. The industrial recovery that seemed to be taking root in the first quarter of the current fiscal year seems to be losing momentum. The insipid topline growth reported by companies in the second quarter also shows that demand has been weak.

2. The current account deficit as a percentage of its gross domestic product in the second quarter was almost double in the same period last year. The deterioration is largely because of weak export growth and a spurt in gold demand. The balance of payments is still comfortable, but it is worth asking whether the reduction in the external deficit after the run on the rupee in September 2013 has now reversed. 

3. Public finances also seem to be under pressure. The latest numbers indicate that the fiscal deficit was nearly 90% of its full-year target in the first seven months of the fiscal year. Tax revenues have been weak because of sluggish growth in the organized sectors. Finance minister Arun Jaitley has already announced austerity measures to keep the fiscal deficit in check. His ability to meet the annual target he has set himself will be severely tested. 

4. The area under sowing this year has been lower than it was last year. The agriculture ministry said last week that the area under the winter crop is around 1.5 million acres less than last year. Earlier estimates had indicated that less land was used for the summer crop as well. Weak farm output could add to high food inflation.

5. Demand for bank loans has been very weak. Many banks have cut the interest rates they offer for fixed deposits because they do not need additional funds at a time when loan growth is slow. There is a lot of excess liquidity within the banking system. The rally in the bond market over the past few weeks is one quick indication that there is a lot of liquidity sloshing around. The State Bank of India reportedly has some Rs.50,000 crore of excess liquidity to manage right now. 

6. The best news continues to be on the inflation front. There are clear signs that disinflation has begun. The latest consumer price inflation data perhaps overstates the extent to which price pressures are reducing. Inflation could pick up after January once the base effect wears off. The possibility of a food price shock cannot be completely ruled out given weak farm output growth. But the current price situation provides the Reserve Bank of India to begin reducing interest rates by a modest amount in the coming months.

The Indian economy is still on the path of economic recovery: the situation is far more likely to improve rather than deteriorate. The most recent data only shows that this recovery is still very fragile. There is also far greater economic stability than about two years ago, if one looks at three indicators of economic imbalances: the fiscal deficit, the current account deficit and inflation. 

However, India continues to do far worse than most other major economies on these important parameters. Some economists have also warned that too much should not be read into volatile monthly data on economic indicators such as industrial output. That said, the most recent data should once again bring out the harsh reality that a robust economic recovery is still some way off. India is slowly limping towards normalcy; there will be the occasional stumble. Some of these sobering realities seemed to have seeped into the financial markets last week. Share prices retreated while the rupee slipped against the dollar. Can India achieve a sustained economic recovery? Tell us at views@livemint.com

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