As with a freely falling body, the deterioration in India’s macro-situation is gathering speed. Speculation about where the economy will land has begun; growth rates of 6-6.5% are being talked about; and, as the European skies darken, crisis-hits and responses are being assessed.
Recent data on industrial output and inflation underlines the worsening situation. Headline inflation was steadfast at 9.7% year-on-year, confirming it is still out of control. Whereas the fall in industrial production gained momentum: The 5.6% year-on-year growth on a seasonally-adjusted and three-month moving average basis (1.9% otherwise) has an eerie resemblance to the 5.3% registered in December 2008. That India’s consumption story is weakening was confirmed by the continued downward trend in consumer goods’ production since April 2011.
Capital goods, the harbinger of future growth, are rolling downhill too. Truth be faced, this series – a proxy of investment – has been on a downward trend since its August 2007 peak. Things don’t look better in the near future either: Equity markets are shut due to fleeing foreign investors; rupee depreciation is pushing up input prices further; financing costs have reached 18-19%; and both internal and external demand is slowing and wobbly. Why should any firm plan anything?
Like the suitors of Lady Lorraine, bad news is coming in droves. Quite unlike the optimism about the lady’s hand though, the droves here point to bleaker economic outlook and weaker policy levers. Corporate profitability fell sharply in the September quarter with net profit margins at a 12-quarter low; at least 10% of the BSE-500 firms posted losses, almost equaling the infamous October-December 2008 quarter, according to a Mint analysis. Recent forex effects and slower demand suggest further earnings downgrades in the next couple of quarters too, impacting further the stock market, already battered flat by a funding drought due to capital flight. Feedback loops with the banking system have begun to reflect in deteriorating asset quality, prompting Moody’s to downgrade the outlook for Indian banks.
Macroeconomic aggregates are rolling downhill too. The authorities are relenting a bit in acknowledging slippage of fiscal targets as they look at the stock market (disinvestment target), slowing growth (revenue targets) and subsidy expenses. Fiscal risks have pushed long-bond yield towards 9% with one or another government paper devolving upon primary dealers every weak. The current account deficit of US$ 14.1 billion in April-June quarter has an uncanny similarity to the $14.6 billion of October-December 2008; unlike that however, the dependence upon short-term capital flows, which are increasingly becoming very volatile, is far higher. The rupee is the whipping boy of the region; this, despite having high interest rates!
With all this, the talk of 6-6.5% GDP growth next fiscal is not so much baloney. Earlier this year, there was little belief in the growth, deficit and inflation forecasts of the authorities. Likewise, it would appear that repeated assertions by policymakers about the economy’s resilience are beginning to defy belief. Why else would there be a search for a landing point?
Renu Kohli is a macroeconomist and former staff member of the International Monetary Fund and the Reserve Bank of India.