In deep trouble

Change of guard alone won't automatically spark recovery

Macroeconomic indicators coming out over the past few days undermine any confidence that may have been there about the economy beginning to stage a recovery. Both the trade and industrial production numbers that were published last week tell a story of the slump prolonging; hardly a green shoot is in sight on both fronts. While it is possible to argue that monthly data are full of noise, relatively volatile and that too much shouldn't be read into them, the trouble is that other data tend to strongly support a more pessimistic outlook on the state of the economy. Take automobile production, for example. In large economies with significant domestic production, this sector is seen as a bellwether for the state of the economy, given its multiple backward and forward linkages. According to the data published last week by the Society of Indian Automobile Manufacturers, the sector has just ended a rather disappointing year, with all major vehicle segments, barring two-wheelers, showing a decline from their levels of 2012-13. Passenger vehicles fell by over six per cent, with volumes dropping even below the 2011-12 level. Commercial vehicles, a very significant business cycle indicator, declined by over 20 per cent, falling to below their 2010-11 level. Even though two-wheeler volumes increased, at seven per cent, growth was nowhere near the soaring rates of a few years ago.

Tales of stagnation abound in other sectors as well. Demand for electricity grew by just about 0.07 per cent in the first 11 months of 2013-14, compared to over five per cent growth in the previous year. Consumer durable sales too are down. Even the much-vaunted public-private partnership model has not lived up to expectations as far as closing the infrastructure gap is concerned. Many companies executing projects under this framework are in deep financial distress, with several of their projects stuck even as they run up costs. A collateral consequence of this is the rising burden of bad assets on the balance sheets of banks. But, that aside, the question has to be asked: how are more funds, desperately needed, going to be brought into the sector? These companies certainly cannot borrow more and private investors would be foolish to infuse equity into them unless there are dramatic changes in the business models. In a business-as-usual scenario, sluggish growth can only be rendered even more so because of a persistent infrastructure gap.

In the absence of any spontaneous signs of recovery and with the Reserve Bank of India focused on the other significant problem, inflation, the compulsion on the new government to get to grips with this frightening situation is enormous. But, given the depth of the problems, it would be naive to expect a mere change of guard to immediately set the recovery ball rolling. The government will need to address the issue at a number of levels to prepare the ground for a sustainable turnaround. In its first communication, it will have to put forward a credible strategy and time frame for dealing with the problem. Soon after that, it will have to announce specific actions that directly tackle some critical contributors to slowing growth and stubborn inflation. To reinforce these, it will have to demonstrate commitment by having credible people in key positions to champion and execute the reform agenda. All of these are risky, complicated and messy processes. Unfortunately, there is very little margin for error in the current economic scenario.