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Business News/ Opinion / Recovery of growth is doubtful
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Recovery of growth is doubtful

Continued contraction of industrial output and export growth in February-March indicates that a recovery is unlikely soon

Industrial production contracted by -1.9% year-on-year (y-o-y), in February, a lot worse than the consensus expectation of 1%. Photo: Indranil Bhoumik/ MintPremium
Industrial production contracted by -1.9% year-on-year (y-o-y), in February, a lot worse than the consensus expectation of 1%. Photo: Indranil Bhoumik/ Mint

The contrast between stock market ebullience and economic performance in India couldn’t be starker. If electoral prospects are pushing stock prices ever higher, last week’s data releases show the economy slipping into deeper trouble. Continued contraction of industrial output and export growth in February-March indicates that a recovery is unlikely soon.

Industrial production contracted by -1.9% year-on-year (y-o-y), in February, a lot worse than the consensus expectation of 1%. It isn’t such a surprise though, considering that industrial output growth has been virtually stagnant in the last two years. Manufacturing growth stood at 1% in 2012-13, while early official estimates pointed to a -0.2% contraction in 2013-14. The Reserve Bank of India’s (RBI) capacity utilization survey for the period October 2012 to September 2013 also showed a rise in surplus capacity.

Still, some bounce back was expected on the strength of revival in exports that lent robust economic support in the second half of 2013. But these proved disappointing as the trade numbers for March showed. Export growth contracted for the second consecutive month, -3.2% (y-o-y), almost the same as February’s -3.7%. This puts a question mark over the ability of external demand to sustain growth in the months ahead.

Exports and agriculture are the two drivers on which 2014-15 growth predictions largely rest. Domestic demand, consumer as well as investment, is down. Discretionary demand has been negative for more than a year. Car sales, for example, dropped by 5% this year, on top of a 7% decline last year, the first such drop in a decade according to the Society of Indian Automobile Manufacturers (Siam). Growth in commercial vehicles fell 20%, pointing the extent of the slowdown. Declining output in the automobile sector has large, negative feedback effects. Unemployment rises (about 45% of the labour is contractual in this segment), while incentives for creating infrastructure such as roads and bridges decline. Firms are stretched on other sides too, viz. over-leveraging, high interest rates, and so on. In such a discouraging environment, businesses cut spending.

This context makes agriculture performance even more important from the perspective of reviving growth. However, the uncertainty in monsoons has risen with a higher probability (75%, against 50% few weeks ago) of an El Nino weather condition occurring this year. Increased possibility of fading rural demand—which supported growth in 2013-14 coupled with a good monsoon that year—induces caution in related industries.

Given the absence of policy support—with both fiscal and monetary policies geared towards macroeconomic stabilization—the key question is how the recent build-up in confidence translates into harder evidence of economic performance. Converting confidence into solid growth numbers is not going to be an easy task.

Renu Kohli is a Delhi-based macroeconomist.

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Published: 17 Apr 2014, 10:00 AM IST
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