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Mumbai: The government’s radical move to lower corporate tax cuts to boost the animal spirits of Indian industry couldn’t have come at a more opportune time, with high-frequency indicators showing that India’s economic momentum dropped to a record low in August.

As many as 10 of the 16 high-frequency indicators tracked by the Mint Macro Tracker were in the red (below the five-year-average trend) last month, a historic low. The tracker launched last October, based on data going back to the previous five years, provides a monthly state-of-the-economy overview based on 16 high-frequency indicators. Last month saw the worst performance on record since October 2014.

Only five of the indicators were in green (above the five-year average trend) and one in amber (maintained trend) in August. The reading has worsened considerably from what it was even a month ago, the data shows.

Amid an aggregate demand slowdown, indicators of the consumer economy saw sharp deterioration last month, after having remained in the red zone since February 2019. The auto slowdown intensified, with passenger vehicle and two wheeler sales declining 41% and 22% respectively over the year-ago period last month. Tractor sales fell by 16.5 over the year-ago period, suggesting that the slowdown is equally sharp in the countryside. This is the worst fall for tractor sales since October 2015, the data shows. Domestic air passenger growth also remained muted, falling to 1.8% (as of July), a three-month low.

The industrial sector, which had shown slight improvement in July, worsened in August with three of four indicators in the red. The Purchasing Managers' Index (PMI) dropped to a 15-month low, and turned red for the first time in a year. Rail freight traffic, an indicator of industrial activity, declined by 6.1%. The core sector growth also remains in the red, with the latest reading (as of July) indicating an anaemic growth rate. Only non-food credit growth remained in the green territory, with bank lending rising at a double-digit pace.

The ease of living index remains nearly unchanged compared to the reading from the previous month. Inflation continues to remain benign. But low inflation and slow rural wage growth also indicate weakness in aggregate demand, corroborating the signals emanating from the consumer economy indicators.

Will the latest tax cuts trigger a domestic revival?

While a simpler tax structure could incentivize investments over the medium term, it’s short-run impact is more uncertain. As some commentators have pointed out, the impact on both fiscal balances and corporate balance sheets depends on the willingness of firms to give up on exemptions that they currently enjoy and move to the new tax regime.

Even if the move triggers a quick turnaround in economic activity, it may not be enough to recoup the revenue losses entirely at a time when revenue collections continue to remain anaemic, and the GST system continues to be plagued with infirmities. Unsurprisingly, the bond markets have reacted adversely to the latest tax cuts even as stock markets are celebrating. If bond yields continue to harden, this will further add to the government’s borrowing costs and widen the fiscal deficit further.

Rising fiscal strain could add to India’s external vulnerabilities in the event of a global shock. As these pages have pointed out earlier, , India’s preparedness to face either a global liquidity shock or an energy shock (that widens India’s twin deficits) is considerably lower than what it was a decade ago.

As of now, India’s external metrics present a mixed record, with the current account balance still in the green territory (as of the March-ended quarter). But with the trade balance deteriorating over the past few months and oil prices at elevated levels, the current account position could worsen. If the dollar continues to strengthen, this could put further pressure on the current account by making imports costlier.

A strong revival in investments and exports could help India navigate her way out of both domestic and external weaknesses. As global value chains get reshaped under the shadow of the US-China trade war and the impending launch of a long-awaited pan-Asian trade deal (RCEP), India’s more competitive tax rates could help the economy grab a larger share of the global trade pie. Whether or not that will happen, or how long it would take for that to happen remains unclear still.

India’s economic momentum may have slowed to historic lows but there is no evidence yet to suggest that economic activity has bottomed out.


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