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Business News/ Opinion / Change in macroeconomic outlook
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Change in macroeconomic outlook

That atmosphere has suddenly turned apprehensive as a spate of April macro data suggested anything but a recovery

The warning bell started ringing as April’s PMI sharply dropped to 52.8 across manufacturing and services (54.3 in March). Photo: MintPremium
The warning bell started ringing as April’s PMI sharply dropped to 52.8 across manufacturing and services (54.3 in March). Photo: Mint

From spotting green shoots just a week ago, observers of the Indian economy are suddenly a worried lot. What changed the outlook so radically?

It was reasonable after all on the part of most to have inferred a cyclical upturn from early trends in quarterly corporate results. Most non-financial firms showed a rebound in sales and net profits in January-March 2016. Although these tendencies had to be upheld in the full sample results when eventually declared to confirm a recovery, as every observer noted, yet the mood was positive.

That atmosphere has suddenly turned apprehensive as a spate of April macro data suggested anything but a recovery. Indeed, all price and economic activity indicators point to an emerging combination of low growth and rising inflation. This contributed much to dampen markets and sentiments since.

The warning bell started ringing as April’s PMI sharply dropped to 52.8 across manufacturing and services (54.3 in March). Industrial production figures for March indicated a flagging dynamics even earlier: the index (index of industrial production) barely grew at 0.1% during the month. It contracted sharply by 2.5% in February and in 2015-16 industrial output growth slowed to 2.5% from the previous year’s 2.8%. The across-the-board decline in the IIP was matched by an equally broad-based 23% contraction in April’s imports, which followed a 22% fall in March. Exports were no better at (-) 6.7% in April 2016, the 17th successive monthly decline.

Retail inflation did its bit to spoil the party. Headline consumer price inflation trended up in April to 5.39% from 4.83% in March against the expectation of 5%. The underlying core momentum remains in the 5-5.5% band—a “stickiness" that Reserve Bank of India governor has also noted. With this, the expectation of any further monetary easing—there were many who expected the policy rate to be lowered over June-August—have been firmly shelved. Credit growth data—an average of 4.9% growth in inflation-adjusted terms for 2015-16, also suggests that the economy has slowed. In 2014-15, the real credit growth was higher at 5.73%.

Economic outlook for April-June also appears dismal if FICCI’s industrial survey is an indicator. It says that manufacturing growth may decelerate due to a bleak export outlook, poor demand and high borrowing costs. Equally, credit growth prospects for 2016-17 cannot be delinked from the overall state of the banking sector. Quarterly performance indicators of most banks, and not necessarily in the public sector alone, have perhaps darkened the growth outlook. Almost all results published so far have fallen way below expectations, while big banks such as State Bank of India and Punjab National Bank are still to disclose their quarterly numbers.

A singular, one-line takeaway from banking sector performance is that non-performing assets have still not peaked. If more assets are expected to sour in 2016-17, as the provisioning trends and commentaries suggest, can banks reasonably restart fresh lending? In fact, clubbing these developments with those on the economic activity front, it would seem further struggle lies ahead.

Renu Kohli is a New Delhi-based economist.

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Published: 17 May 2016, 03:52 PM IST
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