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Contracting Factory Output, Galloping Inflation Belie Claims of Green Shoots in Economy

A government that has been overly cautious, avoiding any mention of an economic slowdown for months together as GDP growth fell to multi-year lows, has now begun changing the narrative by talking of ‘green shoots’.

Finance Minister Nirmala Sitharaman made a mention of green shoots in Lok Sabha earlier this week while replying to the debate on the Union Budget for 2020-21 and repeated these assertions at a media summit later. The Reserve Bank of India (RBI) has also lapped up this narrative, speaking of a bottoming out of de-growth in its latest monetary policy statement.

On Tuesday, Sitharaman said in the Lok Sabha that increasing Foreign Direct Investment (FDI), rise in factory output and over Rs 1 lakh crore GST collection each in the past three months were indications of green shoots in the economy.

"There are seven important indicators which show that there are green shoots in the economy... economy is not in trouble," she said.

Sitharaman said the foreign exchange reserves were at an all-time high and the stock market was upbeat. She said the government's focus was on four engines of growth, which include private investment, exports, private and public consumption.

On its part, the RBI referred to tractor sales (up 2.4% in December after ten months of decline), domestic air passenger traffic growing in double digits in November followed by a modest growth in December, accelerating growth in three-wheeler sales and railway freight traffic, and a turnaround in port traffic in December.

Growth in factory activity (IIP) turned positive at 1.8% in November 2019 after contracting by minus 4% in October. The RBI has also said that the PMI services index improved to 55.5 in January 2020 from 52.7 in November 2019, boosted by a rise in new business and output.

Green shoots refer to signs of visible revival in economic growth. But their sighting seems to have come too soon, since latest data belie these claims of economic revival.

The FM and the RBI have jumped the gun. It is true that some high frequency indicators of the recent past have shown positive sales trend in some sectors. But inflation has been uncharacteristically high, touching a record in December as well as January and latest factory activity data also show that the slowdown is far from over. Any sustained revival in the economy could still be far, far away.

It is true that after three months of contraction (August-October 2019), industrial growth had turned positive in November, supporting the narrative of green shoots. But the index of industrial production (IIP) has turned negative again in December, according to latest data. And for the first nine months of fiscal year 2019-20, IIP growth has come in at a very modest 0.5% against 4.7% in the same period last fiscal.

Analysts say the contraction in factory activity has been broad based in December, which means over more areas of the index than seen previously. And the recent outbreak of the novel corona virus could further dim any prospects of a quick industrial recovery since the exports as well as imports from China would continue to be impacted.

Brokerage ICICI Securities has noted that manufacturing growth, which turned positive at 2.7% in November after three consecutive negative months, fell into the red again in December. And the manufacturing sector almost singlehandedly dragged headline IIP into the negative territory.

The brokerage also noted that production of consumption items — durables as well as non-durables — fell sharply during the month, indicating weakness in both urban and rural consumption. Consumption of capital goods and infra/construction goods also fell, indicating weak investment activity.

Analysts at another brokerage said, “IIP continued to contract in December despite a favorable base. Weakness was broad-based, led by a sharp contraction in consumer durables, capital goods and infrastructure goods. And consumer non-durables, which had been growing at a decent clip until recently, were also now in contraction zone. Industrial activity could remain weak in Q4FY21 (January-March) as the government scales back spending while the export recovery was likely to be delayed by the coronavirus impact.”

A third brokerage said that 16 of 23 industry groups comprising the IIP showed contraction in December. These included motor vehicles, machinery and equipment, manufacturing of food products, tobacco, paper, printing, rubber, computers and machinery. Growth was seen in industries such as manufacturing of beverages, textiles, wearing apparel, leather, wood, coke, chemicals, pharma, basic metals and electrical equipment.

Not just a contracting factory activity, pricier pulses, milk and other food items kept inflation in the danger zone last month and this could mean the RBI refrains from further cuts in lending rates in the near future. CARE Ratings noted that food inflation increased by 11.8% in January 2020 as against the minus 1.3% growth seen in January 2019 though it moderated marginally from a month ago level. Sustained inflation in vegetables, pulses, meat and fish, eggs and milk products along with unfavorable base led to the rise in food prices.

With inflation galloping and factory activity contracting, perhaps this is a good time for the government to offer some more fiscal incentives and postpone any talk of green shoots for another time.

(The author is a senior journalist. Views are personal)