Why A Small Uptick In Core Sector Or IIP Is No Reason To Delay A Fiscal Stimulus

It is best not to be too ecstatic about the 4.9 per cent growth in core sector output in August, a five-month high. The core sector comprises over 40 per cent of the Index of Industrial Production (IIP), and this bump is likely to show up in the IIP too, which grew by 1.2 per cent in July. Any print higher than 1.2 per cent will thus be announced as another sign of “green shoots” in an economy recovering from the downers of demonetisation and the uncertainties of the goods and services tax (GST).

In fact, even if the IIP shows a healthy spike, we should keep our fingers crossed, and the government would do well to unveil its stimulus package regardless. It will be easier to wind back a stimulus by limiting it to this fiscal year (ending March) rather than wait for more data to figure out whether it should be given at all.

There is no denying that some signs are positive. The Nikkei Purchasing Managers’ Index (PMI) for manufacturing was steady at 51.2 in September, the same as in August. Any number above 50 is a sign of expansion. If the services PMI, which was in contractionary zone at 47.5 in August, also shows an improvement in September, we can breathe easier. But we would still not be out of the woods.

Another hopeful signal comes from the rating agencies, Crisil and ICRA. While Crisil upgraded 817 companies and downgraded 434, ICRA upgraded 304 and downgraded 261. Whenever upgrades exceed downgrades, it is an indicator of improving corporate profitability, which is good news on the bad loans front too. If the September quarter bank quarterly results show either a reduction in loan slippages or a reduction in provisioning (or both), we can be surer about the economy turning the corner.

The rise in exports in August by 10 per cent needs to be sustained to give us a sense that things are fine once more on the trade front.

There are three reasons to hold the bubbly.

First, September and October are festival months, and thus a rise in output is natural, especially after the destocking operations in June. We can’t label this revival as significant till we see the PMIs for October, and the IIPs for October and November. Moreover, we need to keep our fingers crossed on agricultural output this season, where overall precipitation was normal, but large parts of India’s grain belt in Punjab, Haryana, western UP, Madhya Pradesh and Chhattisgarh saw deficient rains.

Second, the bank bad loans scenario is nowhere near resolution, and this bit of bad news will start emerging from December, when some of the cases referred to the National Company Law Tribunal start getting resolved. Either way, banks will have to take haircuts, and government may have to find money for recapitalisation.

Third, we do not know how long the GST will take to stabilise, with newspapers still full of stories about blocked input credits, and tech glitches in filing returns and uploading invoices.

Then, of course, there are two jokers in the pack: inflation and the stock markets. We don’t know how inflation will play out, and how the Reserve Bank of India will view the problem. If it remains cautious on interest rates, one reason for market optimism will dim. If global geopolitical factors – North Korea, et al – lead to a global market correction, another hope will start fizzling.

These uncertainties make it obvious that short-term positive signals should not be a reason to hold back on a fiscal stimulus and rate cuts.

A small anecdote tells us why premature optimism would be a mistake. Those who see signs of a recovery already should note that P Chidambaram claimed he saw those “green shoots” as far back as in 2012, based on one month’s IIP spike. But we know what happened when Chidambaram cut down on infrastructure spending and India slipped into a balance-sheet recession from which we are still to recover.