Double whammy

Industrial and trade data dash hopes of economic recovery

Last Friday, both the February numbers for the Index of Industrial Production (IIP) and the March numbers for merchandise trade were published. Both indicators surprised negatively, together dashing any hopes that the economy had at least established a firm bottom, even if recovery may still be elusive. Industrial production overall declined by 1.9 per cent from February 2013, a rather striking fall. Even this was the result of a spectacular performance by the electricity generation sector, which grew by over 11 per cent. In contrast, manufacturing declined by 3.7 per cent. Both the aggregate index and the manufacturing index have shown a decline for the April-February period, making it very likely that 2013-14 will finish that way. The two use-based segments that have contributed most to this performance are capital goods, which declined by 17.4 per cent in February, and consumer durables, which did only a shade better, falling by 9.3 per cent. For the April-February period, the positions were reversed, though. Capital goods declined by 2.5 per cent, while consumer durables fell by 12.2 per cent. Evidently, neither consumers nor companies are inclined to make the long-term commitments critical to engendering and sustaining a recovery.

On the trade front, exports, which had a decent run over the past few months, declined in March. It wasn’t a particularly steep fall — 3.2 per cent in dollar terms — but the reversal does raise questions about market conditions and the competitiveness of Indian exporters, particularly when the rupee has shown signs of appreciating. For the year as a whole, exports grew by over 4 per cent, undoubtedly helped by the sharp depreciation in the rupee during the year. Since inflation remains high, leading to cost and wage pressures, the exchange rate is really the most important short-term factor in protecting competitiveness. Imports also declined, by 2.1 per cent during March — but the more striking number was the almost 12 per cent decline in non-oil imports, which, for the year as a whole, declined by over 13 per cent. As a result, the merchandise trade deficit came in at just over $10 billion; more importantly, for 2013-14, it was over $50 billion lower than in 2012-13. This obviously augurs well in terms of the economy’s response to external shocks and prospects for currency stability; but on the other hand, a growth slowdown is not the best long-term strategy for regaining external balance.

The economy is clearly in a relatively unhealthy macroeconomic situation, with no signs of spontaneous self-correction. Certainly, the vulnerability on the external front has declined considerably. But the worry is that the correction is transitory and a recovery will very quickly take it back up again. The one saving grace is that global economic conditions are a lot less hostile than a year or two ago. While abrupt reversals in capital flows are always a risk, financial and commodity markets appear to have entered a relatively stable zone and the taper is more likely than not to move along in a non-disruptive way. The onus, then, is entirely on the new government to put the economic house in order, and quickly.