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Photo: Mint

A real revival must rely on an investment boom

While our economy is in recovery mode, the path just to regain last year’s output could prove slow and rough. After that, much may depend on whether policy nudges capital formation up

Has the haze of uncertainty cast by covid on our economy begun to lift? India’s official infection curve has been on a decline since its mid-September peak, even as held-back commercial activity picked up sharply enough for the Reserve Bank of India (RBI) to speak of growth being eked out in the second half of 2020-21 after a severe economic contraction in the first. Production this quarter seems back to its pre-pandemic pep in a fairly wide set of sectors, sales in many markets have been in recovery mode, and tax collections no longer look depressed. A second covid wave starting this winter, which cannot be ruled out with or without a vaccine, could mean all bets are off again, but we now have a better sense of our resilience. Take corporate performance. An RBI report says that a sample of non-financial listed entities accounting for about four-fifths of such firms’ market capitalization showed a sharp rise in profits despite battered sales in the second quarter of 2020-21. Cost crushing was the chief reason. Also, asset liquidations by private manufacturers in the first half helped mobilize funds to reduce liabilities and increase cash in hand. India Inc was not alone in conserving cash. Households bulked up their savings, while government spending was muted both at the central and state levels. It will take reliable signs of trend reversals here to bolster a real revival. We have begun to stagger towards one, aided along by government measures, but also risk a loss in momentum.

What we must watch is whether our data upticks will survive past this festive season, which likely saw a recoil of demand compressed by India’s lockdown. Factory output, as measured by the Index of Industrial Production, swung back to growth in September after six months of contraction. But the output of capital goods, a barometer of investment, continued to contract, even if at a slower pace. Order books in the services and manufacturing sectors swelled in October, and e-commerce saw a boom of discount deliveries, though sale registrations of two- and four-wheelers meant for passenger use fell year-on-year, with the former losing a quarter of the volumes recorded in that month of 2019. Fragility may loom elsewhere, too. Tellingly, retail loans this September grew at their slowest pace in a decade. If consumption weakens, inclines seen on many market offtake charts may flag off.

A quick bounce-back was never on the cards. An economy that shrinks, say, by 8.5% this year would need to expand by more than 8.5% in 2021-22 just to reach the size of 2019-20’s pie. Ours was slowing down even before covid, sadly, and now RBI stares at an inflation overshoot of interest rates and another pile-up of bad loans in the financial sector. For a steady and sustainable path out of India’s slump, a fresh capital cycle must kick in. Going by government data on gross fixed capital formation, our overall investment rate went above 30% of national output in 2005-06, peaked at 34.3% in 2011-12 and then slumped. It slipped under the 30% mark in 2015-16 and has been stagnant since. For the economy to expand robustly once it regains last year’s output level, large sums of capital would need to be ploughed in. Apart from farm and labour reforms, hopes are riding heavily on efforts to turn India into a China-like factory for the world. The Centre’s incentive scheme for industrial promotion could draw big money into a dozen odd selected sectors. Combined with action in e-business, that could boost investment. To support such a revival, RBI should keep a close vigil on prices and push for bank reforms.

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