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Stimulus is expected to rejuvenate the economy

Sushim Banerjee
The highest fall has been observed in the capital goods segment (a decline of 6.5% in June and (-) 2.4% in Q1).

In the column last week, we had talked about a few positive factors in the economy, the intensity of which are likely to be visible in Q3 of the current fiscal and beyond. Along with Monetary Policy Review by RBI, a few survey results (based on a sample of interviews) conducted by RBI have come out. The consumer confidence survey portrays a decline in major economic parameters (employment, price, income, spending) in Q2, but a positive tick (however lower than last survey results) in Q3 and beyond. The survey of Professional Forecasters on macroeconomic indicators (59th Round) indicates GDP growth at 6.9% in FY20 and 7.2% in FY21. The gross fixed capital formation is to moderate at 7.6% in the current fiscal (against 10.0% in FY19), only to grow at 9.1% next year. As a percentage of GDP (current market prices) the gross capital formation is to move from 31.5% in FY20 to 32% next year. The private final consumption expenditure (PFCE) is to grow at 7.6% and 8.0%, respectively, in the current year and the next. The projected gross saving rate (as a percentage of gross national disposable income) moves up from 30.2% and 30.5%, respectively, thereby making up the saving investment gap through foreign capital. The headline CPI is to fluctuate between 3.3% to 4.0% and the WPI between 1.9% to 3.0% in FY20. The growth in merchandise exports and imports is to hover within 4.3 and 4.4 range resulting in restricting the CAD at 2% of GDP in the current year. The third survey is of the manufacturing sector order flows, output, employment conditions and exports, imports which are subdued in Q1 and Q2 of the current fiscal. The Business Expectation Index in Q2 of FY20 is marginally down from Q1, although in respect of production, order books, pending orders, capacity utilisation, exports, imports, inventory of finished goods and raw materials, availability of finance from internal and outside sources, cost of production, selling price and profit margin, the major responses do not foresee any change between the first two quarters of the current fiscal. The order books, inventory and capacity utilisation survey (OBICUS) for Q4 of FY19 indicated a marginally higher capacity utilisation of the industrial firms at 76.1%, however indicated an adverse scenario for new order booking and higher inventory build-up.

The above stressed scenario in Q1 has been captured by IIP data. Industrial output growth in June ’19 at 2.0% has brought down Q1 rate to 3.6%. It has been accentuated by a mere 1.2% rise in manufacturing sector during the month (3.6% in Q1). Electricity generation was, however, respectable at 8.2% rise in June and cumulatively at 7.2% in the quarter. The highest fall has been observed in the capital goods segment (a decline of 6.5% in June and (-) 2.4% in Q1). The output of machinery and equipments for defence support, commercial vehicles, bodies of trucks and lorries are lower than previous period. The order deficiency has resulted in lower output of passenger cars, auto components, air coolers, fans, two wheelers and bicycles. It led to de growth in consumer durable segment at 5.5%. The falling trend in output was also observed in pre-fabricated concrete blocks, steel frameworks, pipes and tubes leading to restricted growth in index of infrastructure and construction segment at 2.3% during the quarter. The intermediate goods segment however grew by 12.4% in the month and 9.4% in the quarter, reflecting a better market for roller and ball bearing, gear box, sanitary fittings and fastener. The revision of data based on figures from the unreported units in earlier months may account for this sudden jump in index.

The manufacturing PMI rose to 52.5 in July ’19 from 52.1 in the previous month and may have to wait for July IIP indices to support this buoyancy. The adverse impact on the steel-intensive segments like capital goods, consumer durables was evident in higher steel inventory accumulation with major players. The global market contraction as a fall out of the US-China trade war and retaliatory measures by the EU, NAFTA coupled with economic turmoil in Turkey, Iran, Vietnam and Brazil restricted export opportunities for Indian steel which went down by 23.4% during April-July ’19. In the first four months of the current fiscal, total steel imports was 6.0% lower compared to the previous year, while finished steel consumption at 33.3 MT grew by 5.7% compared to the previous year.

As lack of investment has been stated to be the primary constraint in the economy, RBI has brought down the repo rate under liquidity adjustment facility by 35 basis points from 5.75% to 5.40%, reverse repo rate at 5.15% and the bank rate at 5.65%. A few PSU banks and some private banks have already announced drop in lending rates to incentivise consumer purchase.

The FM has assured the industry of sector-specific approaches, a glimpse of it was observed in reduction of GST rates for EVs. Each country is having a slew of stimulus measures to rejuvenate the economy and India surely would not lag behind.

The author is DG, Institute for Steel Development & Growth (Views expressed are personal)