The economy is bottoming out

add_main_imageFor the past six months, every time there has been an improvement in the macroeconomic data, we have been led to believe the economy is poised to bottom out. Unfortunately, on every occasion the slowdown in the economy and the attendant macroeconomic disorders have only worsened. As we move into 2013 and ready for the biggest show of the year, the Union budget, there are clear signals that the economy is indeed bottoming out.

While one swallow does not make a summer, as we learnt the hard way in the past six months, there is a clear hint of the economy levelling out. Obviously, it is still far away from a recovery; bottoming out of course precedes a recovery and is, hence, an important development.NextMAds

All the more since dropping from high growth of 8-9% to less than 6% for a near $2 trillion ( ₹ 110 trillion) economy has been traumatic, triggering despair, together with the fact that the government was in a funk and a rapidly deteriorating global economic outlook was even threatening a full-blown crisis.

It would indeed be welcome news for the finance minister, who has to ready for an epic magician act: deliver a spending-friendly budget that would retain the government’s populist image with empty coffers.

We should have confirmation that this glad tiding was not a flash in the pan with the release of the third-quarter earnings data beginning later this week. Analyst reports say as much. A analyst report put out by Angel Broking Ltd forecasts that earnings growth will touch double-digit levels for the third quarter ended December. “Our overall coverage companies (152 companies) are expected to report earnings growth of 10% year-on-year compared to 8.8% in 2QFY2013 (second quarter, fiscal 2013).”

The bellwethers are echoing what was signalled by the second-quarter data on gross domestic product (GDP). Unfortunately, it got drowned out in the noise over the overall GDP numbers that showed another round of deceleration—dropping to 5.3% in the quarter ended September from 5.5% in June.

What was missed was that growth in services, which accounts for about 60% of GDP, actually revived from the level of 6.9% at the end of June to 7.2% at the end of September. Similarly, manufacturing rose marginally from 0.2% to 0.8% over the same period. While this data clearly rules out an immediate recovery, it unambiguously tells us that the free fall of the economy has finally hit bottom. And expectations are that this glad tiding will get a boost later this month when the Reserve Bank of India finally delivers what Indian industry argues is the magic bullet to get rid of the current economic ailment—a rate cut.sixthMAds

Whether this does happen or not, it is also true that the bottoming out predicates on the fact that the fresh wind that the government has received after the mid-course change of regime in North Block is sustained; yes, there is a lot of heavy lifting left to do. This would mean providing the political air cover to the finance minister to push through some tough decisions to undo part of the red in the government’s books and to ensure some correction to a structural problem created by the unbridled rise in the fiscal deficit; business-as-usual is certainly not an option.

Alternatively, the downside risks the economy faces from inflation and the external sector could set it into another downward spiral. So the future is in our hands.

Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

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