A mixed picture: Sustained economic recovery is still uncertain

It was a double bonanza for the Indian economy early last week, as two key macroeconomic indicators suggested a turnaround. The data showed that industrial activity, measured by the Index of Industrial Production (IIP), grew at a robust pace for the third straight month, at 7.5 per cent in January from 7.1 per cent in the previous month. The rebound, too, was broad-based — 16 of the 23 industries recorded growth, pushing up manufacturing growth by close to 9 per cent. What set apart the IIP numbers was the strong growth registered in consumer durables, at 8 per cent, compared to 1.4 per cent in the previous month.

 
The second good news was on the inflation front. The consumer price index (CPI)-based inflation rate slowed to a four-month low of 4.4 per cent in February. The deceleration was largely on account of lower inflation in food, fuel, and lighting. The consumer food price index, which had almost touched 5 per cent in December, fell sharply to just 3.26 per cent in February. And even though the core inflation (without food and fuel) rate remained elevated, the headline inflation rate was below the Reserve Bank of India’s (RBI’s) forecast for the March quarter. In the last monetary policy, the RBI had raised its March quarter CPI inflation forecast to 5.1 per cent and projected an inflation range of 5.1-5.6 per cent in the first half of the next fiscal year. The wholesale price index-based inflation rate for February, too, eased to 2.48 per cent for the same set of reasons — a sharp decline after hitting an eight-month high in November. There were other comfort zones as well — while direct tax collection till January showed a remarkable growth rate of 19.3 per cent, the GST revenue also seemed to be stabilising. And though the India Meteorological Department has not given an official forecast yet, initial indications are that the monsoon rains are set for a third good year — another sign of hope for industry.

 
However, it’s certainly not roses all the way. The week ended with sobering news on the exports front, as the February data reflected a contraction in the major exchange-earning sectors such as textiles and engineering goods. Exports grew by just 4.5 per cent in February, which was the third straight month of sharp deceleration after a 30.5 per cent increase in November. Not surprisingly, the trade deficit was considerably higher than a year ago. Overall credit growth in the current financial year was also tepid although there was a sudden spurt of lending towards the end of February, according to the RBI data.

 

The other apprehension about the robustness of India’s overall growth is the rise in contingent liabilities of the public sector enterprises. Reports suggest that state-owned Power Finance Corporation (PFC) could see around 11.4 per cent of its loan book getting into the insolvency route. Similarly, several accounts of the State Trading Corporation (STC), another government enterprise, have been declared non-performing assets because of non-payment of interest on loans. With the RBI unveiling stricter and more transparent norms for bad loans and insolvency proceedings, it is obvious that public sector banks will need more help from the government. A sustained recovery of the economy is thus still uncertain.