May 15, 2019
12 days

What is the issue?

The recent numbers on Index on Industrial Production and other indicators signal an economic slowdown across sectors.

What are the recent indicators?

  • Automobiles - Domestic sales of cars, commercial vehicles and two wheelers all contracted in April, 2019 from a year earlier.
  • There is a decline of almost 16% in total automobile industry sales.
  • This is an indication that consumption demand across markets - urban and rural, institutional and individual - is affected.
  • Sales of commercial vehicles, a fair proxy for overall economic activity, slid 6% last month.
  • A 16.4% drop in demand for two-wheelers extended the segment’s slump into the new financial year, reflecting the rural distress.
  • The data on passenger vehicles, which saw the steepest drop in almost 8 years, add to the weakening trend.
  • IIP - The latest industrial output figures underscore the widespread nature of the demand drought.
  • The Index of Industrial Production (IIP) for March shows output fell 0.1% from a year earlier to a 21-month low.
  • The capital goods sector shrank by 8.7% on the back of an 8.9% contraction in the preceding month.
  • Output of consumer durables fell 5.1% from a year earlier.
  • The growth in consumer non-durables production slid to 0.3% from the 14.1% pace in March 2018.
  • Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag.
  • Manufacturing output contracted by 0.4% after shrinking by a similar extent in February.
  • Overall, the sector’s growth slowed to 3.5% in the last fiscal, from 4.6% in 2017-18.

What are the possible reasons?

  • The possible factors for the slowdown include declining growth of private consumption, weak increase in fixed investment, and muted exports.
  • It could be a result of endemic demand deficiency, deepened by demonetisation.
  • This was later made worse by the NBFC crisis triggered by the implosion of IL&FS and others.
  • It is not clear if the remonetisation of the economy resolved the woes of small firms hit by disruption of working capital cycles and their inability to repay debt.
  • On the other hand, the IBC mechanism has not been able to release the locked assets quickly.
  • This could have added to the uncertain investment scenario.
  • It is, however, true that there were feeble signs of an investment pick-up in 2018-19.
  • This was reflected in higher credit offtake by corporates from SBI and ICICI Bank.
  • However, it is not clear if the rise in bank credit offtake and external commercial borrowings by corporates will translate into greenfield investments.
  • Banks went on a credit spree during the first phase, and unviable infrastructure was created.
  • Resultantly, now the economy is dealing with legacy NPAs, with infirmities in the financial sector still haunting.

What are the implications?

  • All these indicators make CSO’s implicit fourth-quarter GDP growth assumption of 6.5% an overly optimistic number.
  • At the global level, challenges are increasing against the backdrop of an escalating trade war between the U.S. and China.
  • Also, the rising tensions in West Asia are beginning to push up energy costs.
  • Given all these, Indian policymakers have to contend with an external sector that would likely only add to the domestic pressure.

What lies ahead?

  • The distress in the farm sector may just ease marginally if the monsoon does turn out to be “near normal” as forecast.
  • It could also help marginally encourage demand revival in the rural hinterland.
  • However, concerted measures are needed by the government to help reinvigorate demand.
  • The government must also ensure that such a revival is robust, across-the-board and enduring.


Source: The Hindu, Business Line

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