T N Ninan: Still downhill

As each month’s economic numbers roll in, the slowdown gets more serious; and each month it gets clearer than before that government spokesmen who keep predicting an upturn are whistling in the dark. Industrial growth in the last eight months has averaged less than 2.5 per cent, a sustained slowdown that now looks worse than that of 2008-09. Exports too have lost the momentum of a few months ago, and grew just 4.3 per cent in February. Bank credit growth in the first 11 months of 2011-12 dropped to 17 per cent from 21.4 per cent a year earlier, with the most recent months seeing a further slowdown. Corporate profits actually shrank 5 per cent in the October-December quarter — the increased share of sales taken by raw materials and interest ate into margins.

Unusually, business confidence is still high according to the surveys, and electricity generation has surged 9 per cent in recent months, making one wonder who is consuming all that power if industry is without momentum. But a series of troubling macro-economic numbers militate against any action to engineer a broad-based recovery. The high and sustained fiscal deficit and the record current account deficit come in the way of steps to boost demand, as do the persistently high inflation numbers (8.8 per cent in February). High interest rates stand in the way of a revival of credit-driven demand in sectors like housing and automobiles (the latter has had a miserable year, with 2 per cent growth). Trail-blazers like telecom and software services have lost some of their fizz, while once shining sectors like aviation are in cloudy skies, even as the beginning of a shake-out in the media reflects the slowdown in advertising spends. The slowdown has also meant that the quality of banking assets has deteriorated, so banks are under pressure to watch lending norms.

When it comes to administrative and legislative action to deal with the slowdown, the factors that have held up investment still exist — like the continuing paralysis on the rules for mining and land acquisition. Environmental clearances also continue to be stop-go-stop, with Posco’s troubled steel project in Odisha the latest to be flashed a red light. Key reform measures, like the long-delayed introduction of a goods and services tax, remain in limbo. And for all the evidence that the surveys provide — of high levels of business confidence — the truth is that businessmen are discouraged, and getting disenchanted with the waywardness of the Indian operating environment. Last month’s Budget has not helped. It is hard to deny that there is some flight of capital taking place; some businessmen now talk quite openly about business life being much easier in other geographies. If domestic capital goes on strike, you can be sure that international investors will follow suit.

The state of the world adds to the problem. Europe seems ready to plunge into crisis mode again. Some US numbers look shaky, and China is slowing down too, finding reflection in lower commodity prices this year — which should have given India some relief on the price front, except that it doesn’t show. A country credit downgrade by one of the international rating agencies is possible, if one goes by the buzz, and that may push India below investment grade. Naturally, the currency shows signs of weakness, and it may be just as well if it slips some more. Toss in the possibility of no stable government being possible after the next Lok Sabha elections, due in two years, and it begins to look like a perfect storm building up. This is the time to demonstrate leadership, but the government gives every impression of being tired, dispirited and bereft of both ideas and energy — except for some bad ideas that expand the scope for arbitrary actions.