Source: Economic Times

 

The Indicus growth forecast at 5.4% for the July-September 2102 quarter was just a tad higher than the 5.3% CSO number.As said earlier, the economy is stuck in a trough and, in the current quarter, it will turn in a similar performance. Overall, the economy is moving steadily towards a medium-term growth slowdown that should last well into 2014 at the very least. Prime Minister Manmohan Singh watches as his government takes India back to the sub-6% growth levels. 

 

But there are some not-so-dark spots in the gloom that indicate that the next quarter of the year can do slightly better. The Q2 estimates show that the gross fixed capital formation rate has moved up and stayed around 33% so far. Despite a poor kharif harvest, subsequent rains indicate that the rabi season could turn out well. The Markit Purchasing Managers’ Index shows expanded manufacturing growth in November as well. Global conditions have stabilised, albeit at a low level. And, the services sector has shown good performance, though part of this is through government expenditure. Ultimately, it is the services sector that has kept the economy from completely collapsing so far. However, going ahead, the services sector cannot pull the economy alone; without support from industry, even 8% growth is not feasible next year. 

 

The manufacturing sector, that was marginally better than in the previous quarter, unfortunately will not perform significantly better even in the current quarter. While October will show 3% growth in manufacturing index of industrial production, this ‘high’ number would be due to the base and festival effects, rather than a surge in production. The question is, how can the situation change? Production levels can get a kick-start only when there is some direction to investment, and this has not materialised yet. We stay stuck, at best, in the 5.5% rut till that happens. 

Once again, a low growth number raises the question of a possible rate cut, and the discord between RBI and the finance minister comes back into focus. Will this push RBI to cut rates? The guidance from RBI talked of no change till January, and all eyes are now on inflation data. The wholesale price index for October showed a slight dip, yet, this may not be enough to satisfy RBI. This is because all core pressures from fuel and food continue to hold. The Indicus Price Monitor that tracks realtime mandi prices shows sustained inflationary pressures in rice, wheat, oilseeds and so on. 

 

More importantly, a ‘game changer’ of direct cash transfers announced by the government last month should be giving RBI more sleepless nights. By itself, cash transfer is an effective way to give subsidies, yet, there is no clear directive on how the scheme will function. This is typical of this government’s policy announcements over the last few years. The recent cap on LPG subsidy shows how lack of clarity in implementation has caused an upheaval: neither consumers nor, it appears, the PSUs servicing them have an idea what the new rule actually means, and state governments have also been thrown into confusion on whether they can afford the extra burden. Similarly, the plan for direct cash transfers does not give the details and it is difficult to gauge the impact on government expenditure. 

So, while on one hand, there could be an inflationary impact, on the other, and more crucially, once again, there is no focus on raising productive capacities. 

 

Meanwhile, on the trade front, the situation is similarly grim. Low global growth restrains the potential for export surge, and as imports keep pouring in, the current account deficit and the rupee remain precariously tipped. Yet, as things stand today, the next year can show a revival of the economy. This depends critically on whether manufacturing and core industries like power get a boost. The government has to come out with plans for this, but will the newly-constituted National Investment Board really get things going on the ground? The right question to answer is: can we ever hope to touch double-digit growth by just committees and shuffling ministers around in new arrangements? And, if not, why are the stock markets so excited?