NEW DELHI :
The Union budget 2019 will be presented at a time when the economy is losing momentum. That’s the central message from the latest update of the Mint Macro Tracker, launched in October to provide a comprehensive view of 16 high-frequency economic indicators.
The Macro Tracker shows that out of the 16 indicators, five were in the green (above the five-year average trend) as of December 2018, while eight indicators were in the red (below the five-year average trend).
These figures are considerably worse than what they were even six months ago, when eight indicators were in the green, and five in the red.
As India’s gross domestic product (GDP) numbers are released with a lag of three months and, given the persistent doubts surrounding calculations of the new GDP series , it becomes important to track other high-frequency indicators to gauge the state of the economy.
The 16 indicators captured in the Macro Tracker reflect trends across four aspects of the economy: consumer spending, industrial activity, external vulnerability, and ease of living (which measures inflation and the jobs scenario). On two of these aspects, the picture appears far more grim than before while in the two other arenas, the picture is broadly the same.
With sales of passenger vehicles and two-wheelers slowing, the consumer economy seems to be the hardest hit sector.
And with weak demand conditions, auto analysts are factoring in lower growth in the months ahead.
The industrial sector report card also suggests a weakening of momentum. The purchasing managers’ index (PMI) manufacturing index showed an expansion in its last reading but it was lower than in the previous month.
Core sector growth (which captures trends in eight key industries—electricity, steel, refinery products, crude oil, coal, cement, natural gas and fertilizers) slid to a 16-month low of 3.5% in its last reading in December (reflecting data for the month of November).
The slowing momentum of the economy is also reflected in a slowdown in private investments, data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) shows.
On the external front, India’s vulnerabilities arising from high import dependence remain, but the drop in oil prices has provided a temporary relief, with the trade balance indicator moving from red to amber. This is also reflected in the resilience of the rupee, which is no longer an underperformer among emerging market currencies.
The price signals are a bit mixed, with headline inflation low but core inflation relatively high over the past few months. Rural wage growth has continued to disappoint.
Overall, the Macro Tracker suggests that the economic momentum is slowing in India, with weak aggregate demand, tepid wage growth, and relatively low price pressures in the economy.
All of this could be the perfect foil for an expansionist budget on 1 February. However, that will effectively demolish one of the key achievements of the National Democratic Alliance (NDA) government: fiscal consolidation. To be sure, the government has benefited from the bonanza of lower crude oil prices, and it has ‘creatively’ managed its books (bit.ly/2T0uLVn) to make the fiscal deficit look respectable.
Nonetheless, it is worth noting that this government has resisted the urge to go on a spending binge till now.
It was an extraordinary spending binge in the aftermath of the 2008 financial crash that eventually led to a mini-balance-of-payments crisis in 2013 before the previous United Progressive Alliance (UPA) government began tightening its belt. The belt-tightening continued under the current dispensation, helping India shed the tag of being among the ‘fragile five’ among emerging markets . Lower inflation, relatively lower fiscal deficit, and a significant forex buffer ensured that 2018 did not become another 2013 despite a sharp spike in oil prices and a widening of the current account deficit.
Yet, the oil shock of 2018 may have exacerbated the slowdown --- in an economy where investments have been lacklustre for quite some time—by curtailing demand. With economic momentum slowing ahead of the Lok Sabha elections where it will face a rejuvenated Congress party, the temptation for the NDA government to raise public spending has perhaps never been greater than it is today. A lot rides on the quantum and the nature of that spending boost. If the government chooses to boost spending by handing out doles to a large section of the population, it will no doubt boost its electoral fortunes. But it would also help revive inflation, risk macro-instability, and undo its own legacy of fiscal consolidation and inflation-control by exercising that choice. The first of February will tell us which path the government chooses.