Economic Slowdown - May 2019

What is the issue?

The recent numbers on Index on Industrial Production and other indicators signal an economic slowdown across sectors.

What are the recent indicators?

• Automobiles - Domestic sales of cars, commercial vehicles and two wheelers all contracted in April, 2019 from a year earlier.
• There is a decline of almost 16% in total automobile industry sales.
• This is an indication that consumption demand across markets - urban and rural, institutional and individual - is affected.
• Sales of commercial vehicles, a fair proxy for overall economic activity, slid 6% last month.
• A 16.4% drop in demand for two-wheelers extended the segment’s slump into the new financial year, reflecting the rural distress.
• The data on passenger vehicles, which saw the steepest drop in almost 8 years, add to the weakening trend.
• IIP - The latest industrial output figures underscore the widespread nature of the demand drought.
• The Index of Industrial Production (IIP) for March shows output fell 0.1% from a year earlier to a 21-month low.
• The capital goods sector shrank by 8.7% on the back of an 8.9% contraction in the preceding month.
• Output of consumer durables fell 5.1% from a year earlier.
• The growth in consumer non-durables production slid to 0.3% from the 14.1% pace in March 2018.
• Manufacturing, which has a weight of almost 78% in the index, continues to be the biggest drag.
• Manufacturing output contracted by 0.4% after shrinking by a similar extent in February.
• Overall, the sector’s growth slowed to 3.5% in the last fiscal, from 4.6% in 2017-18.

What are the possible reasons?

• The possible factors for the slowdown include declining growth of private consumption, weak increase in fixed investment, and muted exports.
• It could be a result of endemic demand deficiency, deepened by demonetisation.
• This was later made worse by the NBFC crisis triggered by the implosion of IL&FS and others.
• It is not clear if the remonetisation of the economy resolved the woes of small firms hit by disruption of working capital cycles and their inability to repay debt.
• On the other hand, the IBC mechanism has not been able to release the locked assets quickly.
• This could have added to the uncertain investment scenario.
• It is, however, true that there were feeble signs of an investment pick-up in 2018-19.
• This was reflected in higher credit offtake by corporates from SBI and ICICI Bank.
• However, it is not clear if the rise in bank credit offtake and external commercial borrowings by corporates will translate into greenfield investments.
• Banks went on a credit spree during the first phase, and unviable infrastructure was created.
• Resultantly, now the economy is dealing with legacy NPAs, with infirmities in the financial sector still haunting.

What are the implications?

• All these indicators make CSO’s implicit fourth-quarter GDP growth assumption of 6.5% an overly optimistic number.
• At the global level, challenges are increasing against the backdrop of an escalating trade war between the U.S. and China.
• Also, the rising tensions in West Asia are beginning to push up energy costs.
• Given all these, Indian policymakers have to contend with an external sector that would likely only add to the domestic pressure.

What lies ahead?

• The distress in the farm sector may just ease marginally if the monsoon does turn out to be “near normal” as forecast.
• It could also help marginally encourage demand revival in the rural hinterland.
• However, concerted measures are needed by the government to help reinvigorate demand.
• The government must also ensure that such a revival is robust, across-the-board and enduring.

Source: The Hindu, Business Line