With October Here, Is The Worst Over For India’s Economy?

At a time when we are unearthing more banking frauds and there are serious concerns with respect to the frequent regulatory lapses, India’s core industrial sector growth declined by 0.5 per cent. This means that very likely the trend of growth slowdown continued in the second quarter of the financial year.

Recall that the previous growth forecast for second quarter was revised from 5.2-5.6 per cent to 4.8-5.2 per cent post the 5 per cent growth figure for the first quarter of financial year (FY) 2019-20.

The sluggish growth in goods and services tax (GST) collections, muted industrial activity in July and first quarter (Q1) growth at lower end of the previous Q1 forecast of 5-5.4 per cent made a strong case for the downward revision.

Despite the model giving a range of 4.8-5.2 per cent of growth for Q2, the series of announcements made by Finance Minister Nirmala Sitharaman, especially with respect to micro small and medium enterprises (MSMEs) and the clearance of their pending refunds within 30 days, were encouraging signs.

The recent corporate tax cuts are more encouraging as they are both counter-cyclical and structural in nature. These moves will have a positive impact on growth, but policy interventions do take time to show result.

However, the fact that government has been proactively addressing some of the bottlenecks to our growth made me adjust the forecast to 4.9 per cent to 5.3 per cent. This adjustment was made simply based on the attempt by government to revive growth and not on any statistical exercise.

Therefore, this adjustment is subjective in nature, but then again, all forecasts have some element of subjectivity in them.

An important caveat, it is very difficult to estimate Q2 figures at the moment because we don’t have the necessary data for the month of September and therefore, once more data is available, we may see a further revision to the forecast.

The core index of industrial production (IIP) growth figure has only reinforced the forecast range. This means that very likely we are going to witness growth to be closer to the figure for first quarter. But I have always maintained that economic recovery looks likely from Q3 onwards and with October here, it is only natural to ask if the worst is already over?

With the series of measures announced by the government, it is certainly likely that growth in the second half of financial year is likely to be stronger than the first half.

The question worth asking is if it will be enough if it’s close to Reserve Bank of India’s (RBI’s) forecast of 6.9 per cent and the answer is a definite no!

We have limited information of how the economy performed for the month of September and recovery should ideally begin from September. We will get some idea of what is happening to consumption once we have the GST collections data.

But, with October already here and a near normal monsoon, the worst is possibly over. For all the naysayers, discussing the stagnation of agricultural income, have missed the fact that PM-Kisan scheme can offset a part of the negative impact of low food prices in the rural areas.

The fact that it is over and above existing programmes further implies that we may see the start of revival of rural demand in the foreseeable future.

Similarly, though our real rates are high, but they have come down from 3 per cent plus to 2.15-2.2 per cent. While we still have a long way to go, but this combined with external benchmark-linked loans can be proactive in turning around the economy from Q3 onwards.

The impact of GST refunds for MSMEs combined will show its full impact between October-December while the immediate revival of sentiment due to corporate tax cut will further assist in turning around the economy. Thanks to the corporate tax cut, we can expect greater capital inflows in the near future.

While there are concerns with respect to recent banking frauds that have been discovered, but India’s financial system is robust and sound to handle such instances.

Therefore, these issues are likely to be resolved and there is a low possibility of them dampening the process of economic revival. A reduction in aggregate non-performing assets (NPAs), front loading of bank recapitalisation, proactiveness of the Finance Ministry to engage with stakeholders and the pace of decisions will likely have contributed to this recovery.

All this signals that the worst is over and we are looking at economic recovery going forward. Growth in Q3 may very likely be below or closer to 6 per cent while Q4 may still find it above 6.4 per cent. But the broad trend of recovery may continue throughout the next financial year as we move back to a 7 per cent or higher level of growth rate.