Don't assume a recovery

What the crash in company orders means for Budget projections

When the advance estimate of gross domestic product for this financial year, 2012-13, was released earlier this month and suggested India would grow at only five per cent, some in the Union finance ministry dismissed it as an overly simplistic extrapolation. They suggested that, since the estimate perforce excluded more recent data, it did not take into account the supposed fact that the Indian economy had bottomed out at the end of calendar year 2012 and was now on the path to recovery. Of course, it is an arithmetical truth that a recovery would have to be pretty far along to ensure growth at higher than five per cent. However, this assumption itself is far from tenable, as recent data on industrial production showed. Some might – and did – claim that the index of industrial production is too volatile and unreliable; but now this newspaper has analysed fresh order flows for domestic companies, and that analysis paints an even more disturbing picture. Far from having bottomed out, the Indian economy looks like it has gotten sharply worse in recent months.

According to the analysis based on firms’ order inflow filings to stock exchanges, the quarter that ended in December 2012 saw new order inflows at the lowest level in nearly four years — Rs 37,371 crore. Worse, the current quarter has not seen any major recovery; order inflows till February 22, with more than half the quarter over, stood at Rs 15,783 crore. These macro numbers are substantiated by micro stories. The pace of new investments is slow (barring perhaps in the power sector), and many projects earlier promised, then stalled, are now being cancelled. It is clear that the tinkering that the government has done with respect to the infrastructure climate over the past six months is yet to bear fruit. The real economy continues to suffer, even if New Delhi wishes to claim that the investment climate has changed.

This means that the Budget later this week cannot take growth for granted. Obviously, attention across India and the world will be focused on the headline fiscal deficit number. But the government’s other actions on easing the real investment climate – by pushing for more orders, speeding up clearances, and getting state governments to fix their often onerous permission-granting processes – will be crucial. In the meantime, the government should not suppose that a fiscal deficit number that depends crucially on overoptimistic growth projections will be believed. Given the fact that few new orders are on the books and recent actions have not changed that status around, a projected growth rate for 2013-14 well over, say, six per cent will require the suspension of disbelief. And disbelief in government projections is not a commodity in short supply at the moment. Nor can the Budget alone be expected to get industrial growth and investment back on track. The United Progressive Alliance must bend its entire legislative agenda in the Budget session of Parliament around passing necessary and overdue legislation, such as on land acquisition.