India Markets closed

Core sector growth shrinks 5.2% in September: With economy showing more signs of stress, Q2 GDP set to be damp squib

Dinesh Unnikrishnan

The growth in eight core sectors shrank by a massive 5.2 percent in September, after contracting 0.5 percent (later revised to 0.1 percent growth) in August and against an expansion of 4.3 percent in September 2018. Seven out of eight sectors contracted this time. The message is loud and clear: The second quarter Gross Domestic Product (GDP) growth is set to be another shocker. The core sector contributes 40 percent of the weight of Index of Industrial Production (IIP) hence that number for the month too is expected to take a hit.

If IIP falls, that is set to reflect in the national GDP numbers. In September, the production of seven sectors of coal, crude oil, natural gas, refinery products, cement, steel, and electricity contracted while fertilizer production increased by 5.4 percent. If one looks at the whole April-September period, the growth of core industries fell to 1.3 percent against 5.5 percent in the year-ago period.

The key takeaway from these numbers is this: The economy continues its downward course and things are not yet looking up to hope for a turnaround; not yet. In fact, there are a number of factors that indicate a grim economic situation. The unemployment situation is worsening and is poised to be a major challenge for the Narendra Modi government. Even the government's surveyors put it at a 45-year high. The economic activities are slowing.

According to rating agency CARE, the first-half of FY20 witnessed subdued activity in terms of cargo volumes and passenger traffic. While airline traffic and port traffic managed to report low growth.

Railway freight volumes recorded 0.5 percent de-growth in cargo handled in terms of tonnage during the first half of the current fiscal. This is a considerable decline from 5.4 percent growth recorded in H1-FY19.

Major ports recorded 1.5 percent growth during H1FY20 vs 5.2 percent growth during the corresponding period in the previous year.

Bank credit to industries has been contracting too with only top-rated larger companies managing to get credit while small and medium enterprises (SMEs) continue to struggle.

International agencies have begun to slash the full-year economic growth of the country with Moody's forecasting close to 6 percent full-year growth.

Despite the festive season, passenger and commercial vehicle sales are down. In September, passenger vehicle sales in India too plunged by 24 percent. Consumer confidence has fallen to a six-year low in September as sentiment on the overall economic conditions and employment availability expectations remained negative among households, according to a survey conducted by the RBI. The problem is that government spending which has basically supported growth for a long time is losing steam. The reason isn't difficult to understand.

Revenue collections aren't good enough to fill the void. Collections from India's nationwide Goods and Services Tax (GST) fell to a 19-month low in September, while direct tax collection growth since the beginning of the current fiscal stands at 6 percent so far, far below the required growth rate of 17 percent. Till September end, the fiscal deficit has already touched 93 percent full-year target.

Logically, the present economic situation warrants steeper rate cuts from the monetary policy authority, but that wouldn't help much because the current slowdown is driven by lack of demand. The government will have to go back to the basics and find ways to put more money in the hands of households to spend more.

In his interview with Karan Thapar for The Wire, Bibek Debroy, chairman of the Prime Minister's Economic Advisory Council (PMEAC) acknowledged that the economy is in a worrying slowdown phase. This remark from one of the top economic think-tanks of the government is positive since admitting the problem is the first step to resolution.

Debroy's suggestions to address the economic situation included simplifying the GST tax slabs. During the interview, Debroy suggested that both zero and 28 percent tax slabs are to be abolished at the earliest, retaining only three slabs€"6 percent, 12 percent and 18 percent. Land and labour reforms need to be taken up urgently to get more foreign investments to India.

The point is, merely improving position in the ease of doing business rankings list wouldn't help unless the change is felt by the potential entrepreneur on the ground. Similarly, privatisation of public sector banks (PSBs), not merging them, should be the way ahead to free up these institutions from government control and get private investments. The worsening economic situation warrants swift policy moves and aggressive disinvestment plans to raise money and channel those funds to infrastructure creation and housing.

(Data support by Kishor Kadam)

Also See: India needs fresh reforms to be in top 50 nations with ease of doing business: World Bank official

India at 63 in World Bank's Ease of Doing Business: Nirmala Sitharaman promises further GST simplification to improve ranking

India ranks 63 in World Bank's Ease of Doing Business: Govt reforms help to inch up rankings, says Commerce Ministry

Read more on Business by Firstpost.