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Recovery will take time

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Recovery will take time

Tuesday, 17 September 2019 | Karan Bhasin / Prachi Jhamb

Recovery will take time

The pace of economic reforms indicates that the FM has grasped the problem and we should see a fiscal revival but it may have an impact only from the third quarter

There has been a lot of talk on the economic slowdown ever since we saw the first quarter growth results. The fact remains that the Finance Ministry has been working round-the-clock to address some of the critical concerns on the economic front both in the short and the long-term.

However, as is the case, most such measures are likely to have an impact only from the third quarter onwards. But the pace of reforms indicates that the Government has understood the different contours of the problem — and this should be a positive sign for economic revival.

As far as the second quarter is concerned, now is the time to look at the high frequency indicators and sit down to forecast economic growth. As with any forecasting exercise, it’s important to keep in mind that most such exercises are subject to statistical errors and conditional on whatever information is made available at the time of the forecast. In all likelihood, we will update our forecast in the first week of October.

One of the authors had a forecast of 5.0-5.4 per cent of growth for the first quarter while another predicted 5.2-5.6 for the second quarter. Since then we’ve seen further weakening of consumption data, combined with less than encouraging automobile sales.

The automobiles industry makes up around seven per cent of the country’s Gross Domestic Product (GDP) but it has been in the news for slowing down tremendously, leading to loss of jobs and further impacting the slowdown in consumption. The data released by the Society of Indian Automobile Manufacturers (SIAM) on sale of all vehicles in India shows that the growth in sales fell the most post-2018. The data on private vehicles shows the same trend.

However, the data on commercial vehicles shows that growth was the slowest in 2016 and even though it recovered in 2017, growing at about 29 per cent, since then it has slowed down. The growth in sales of two-wheelers and three-wheelers has been falling since the first quarter of 2018. The fact that the automobiles sector is facing a slowdown shouldn’t come as a surprise, given that it had a significantly higher growth in the preceding year. So, part of the slowdown is because of the high growth last year while the rest is explained by the Non-Banking Financial Companies’ (NBFC) crisis, the shift to BS-VI emission norms and, of course, to the use of Ola/Ubers.

Consequently, there is a need to re-imagine the automobile business and many leaders of the industry have expressed this sentiment over the last couple of weeks. Further, the low consumption growth is well reflected in the monthly Goods and Services Tax (GST) collection numbers which have only witnessed a modest growth on a year-over-year basis. Therefore, in all probability, growth in the second quarter is likely to be muted— but, from the third quarter onwards, we may see a swift recovery aided by several measures by the Finance Ministry.

Our forecast for the second quarter has modified since then as recent data show that growth in the second quarter may well continue to be low. Consequently, given that the first quarter figures were more towards the lower bounds of the forecast, based on recent data, our forecast stands at 4.9-5.3 per cent of growth for the second quarter.

The silver lining is that the Index of Industrial Production (IIP) has shown a very healthy growth and while it covers only a very narrow scope of economic activity, it is a definite signal of revival. Consequently, it is very likely that the forecast is reversed upwards and growth may well be towards the upper limit of the forecast in contrast with the first quarter. What this essentially means is that there are early signs of economic recovery, which are indeed encouraging, given that we had bottomed out at five per cent.

For the third quarter, growth may well be between 5.8 to 6.2, but this is just a preliminary forecast as we wait to see the impact of the current announcements that have been made by Finance Minister Nirmala Sitharaman.

Some of these announcements have already been implemented and will have a definite positive impact on the economy. One of them relates to  GST refunds for Micro, Small & Medium Enterprises (MSMEs) which have been a concern since their introduction. The Government has recognised that there is a need to have a system for time-bound refunds and it has ordered that all existing ones be cleared within 30 days. Going forward, all refunds should be cleared within 60 days. This will have an immediate impact on addressing the working capital constraints in the MSME space which, in turn, will ensure that the system is infused with fresh liquidity. It is likely that this will have an impact as far as growth in this and the next quarter is concerned.

Similarly, the Government has tried to address concerns of the automobile industry by removing the ban from replacing current vehicles, which will try to absorb some of the accumulated inventories over the last couple of months. What is important is to also consider that the Government has committed to the expenditure as stated in the Union Budget and to the Fiscal Responsibility and Budget Management (FRBM) Act. This suggests that expenditure will continue as per plan and any revenue shortfall may be met through increased disinvestments. Both are again a positive sign for the economy — although one needs to further evaluate whether there’s any difference between a 3.3-3.5 per cent of deficit, especially during a time when growth has been slow.

Similarly, consolidation of banks, combined with several governance reforms and aggressive moves on the relaxation of external commercial borrowings for NBFCs and now even for affordable housing projects, are both progressive decisions that reflect India’s demand for foreign capital.

For the first time, there’s a pragmatic realisation that India is a capital-deficit country and the only way to meet our need for investment would be to seek foreign capital. Luckily, low and negative yields elsewhere make India a no-brainer as far as movement of capital is concerned. Harsh Gupta — a hedge fund manager and a financial columnist — has worked extensively on this area as he’s documented the need to be progressive in our outlook towards foreign finance. 

It is important to have a progressive and pragmatic outlook towards addressing the current crisis. We need to simultaneously focus on revaluating some of our previous policy choices and think hard on whether they’ve helped us meet our growth aspirations. The Finance Minister is doing the same with a strong commitment towards reviving economic growth and towards deep structural reforms. The three press conferences have given us a signal that Sitharaman means business and this fact itself makes us extremely optimistic about India’s economic prospects over the near term.

While growth may be low for the second quarter, economic recovery may start from the third quarter and we may be back on the seven per cent plus growth track by the next financial year. In fact, if we continue with the same trajectory, then very soon we may just manage to push our potential growth to 8.5 and sustain an eight plus growth rate for a prolonged period.

(Karan Bhasin is a New Delhi-based policy researcher and Prachi Jhamb is a research associate with the Reserve Bank of India)

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