Cautionary signals

December 22, 2014 

The Mid-Year Economic Review for 2014-15 is realistic in its projection of 5.5 per cent growth during this fiscal. Economic data released last week on industrial output, trade deficit and inflation clearly show that the growth impulse is still weak and that the economy is yet to attain a steady state. The 4.2 per cent fall in industrial output recorded in October has raised doubts over the strength of the ongoing economic recovery. October, being a festival-season month, ought to have seen a rise in manufacturing to meet demand for goods, but output, especially of consumer goods, dipped. 

However, trade data for November showed a rebound in non-oil, non-gold imports — machinery imports were up by 20.32 per cent — indicating that the dip in industrial output in October may be an aberration and that November could throw up better numbers. Corroborating this assessment is the fact that the auto industry had a good month in November with car sales rising by 9.52 per cent. But in the same month, the trade deficit widened to an 18-month high due to a surge in gold imports driven by lower duties, a fall in international prices and festival season demand. Notably, the deficit widened despite a contraction in the crude oil import bill by $1.26 billion, or 9.73 per cent.

Though export growth recovered to 7.27 per cent in November after a fall during October, from hereon the going is likely to be tough for exporters given the uncertain global environment caused by falling oil prices. Petroleum products exports, which account for a fifth of India’s total exports, dipped by 14.15 per cent in November, reflecting the difficult market conditions abroad. Though it is not time to worry yet, the government and the Reserve Bank of India need to monitor the trade data closely and prepare to take corrective action on gold. What should worry policymakers is the fact that fresh investment, which is critical to the revival of growth, is just not happening. 

The Mid-Year Economic Review refers to how private investment is not picking up, and to make up for this it suggests that public investment should accelerate. This is easier said than done given the sorry state of government finances. The Review notes that there is likely to be a revenue shortfall of Rs.1.05 lakh crore during this fiscal due to overestimation in the Budget and slow revival. Indeed, meeting the fiscal deficit target of 4.1 per cent is going to be rather tricky in this backdrop. In the short term, therefore, it is difficult to see public investment as a saviour. It may at best be an option to consider in the medium term, and that is assuming there are no setbacks in the next year or two. The only way forward now is to encourage and support private investment — for which the government and the RBI need to work together.