As India seeks to recover its economic verve, Nirmala Sitharaman has sought to assure everyone that there is reason to be optimistic. The finance minister told lawmakers in Parliament this week that “green shoots" are starting to emerge, and that the economy’s troubles may soon be a thing of the past. Among the signs of promise sighted, she cited a recent rise in India’s foreign exchange reserves, an uptick in goods and services tax (GST) revenue, stronger inflows of foreign direct investment, an expansion in factory output, and a buoyant market for stocks. Of these indicators, a revival in the government’s GST intake would be the only one that reliably offers relief on the near-term outlook, but that too only if January’s figure of ₹1.1 trillion can be beaten month after month. Meanwhile, other numbers look too weak for us to count on a rebound just yet. Car sales, for instance, are refusing to bottom out. They fell 6% last month in comparison with the previous year. Lending remains anaemic, idle capacity persists at far too many factories, and stress within the financial sector hasn’t eased enough. Even industrial production fell 0.3% in December from a year earlier. In all, there isn’t much cause for cheer.
While nobody should succumb to needless gloom, a realistic assessment of the next six months would have to take into account a few new risks to our economic performance. Inflation has been above the central bank’s official tolerance limit for two successive monthly readings, and efforts to ease credit could suffer a setback if inflation does not slow soon. Added complexity is thrown into the picture by the government’s patchy record on fiscal control. The biggest uncertainty right now, however, can be traced to the potential of widespread business disruption caused by the coronavirus outbreak in China, which accounts for 17% of the world’s output. But it isn’t just a global slump in commerce that could hurt India’s economy. With curfew-like conditions in large parts of China, production has got paralysed in various industrial belts. The upshot is that a growing number of Indian enterprises have got starved of inputs from there. Exposure to the crisis goes far beyond bulk drugs for medicines, solar panels for electricity and components for vehicles. Indian companies across a wide span of sectors are reportedly in a flap. A few Chinese plants have resumed work in recent days, but suspicions have also arisen that Beijing has concealed the true extent of the epidemic, which could mean that the shutdowns may not be as short-lived as initially hoped. How badly China-reliant Indian producers are hit would depend on a range of factors. These include current inventory levels, access to alternatives, and, least predictably, when the coronaviral paralysis will peak.
At the end of it, the virus may do less damage than feared. It’s also true that modelling the eventual impact of it is still something of a fool’s errand at this stage, with much guesswork involved, though this only means that both the best and worst case scenarios being assumed could be exaggerated. Either way, prudence demands that we prepare ourselves. Even a remote possibility of actual green shoots getting snuffed out by input scarcities should be taken note of. Perhaps it’s time for the government to quickly assess business vulnerabilities and, if need be, coordinate the adoption of a contingency plan with various industry bodies. In the interim, we should temper our economic optimism.