Green shoots? Not yet

Addressing global CEOs and prospective investors at the Vibrant Gujarat summit, the Finance Minister must have been relieved that the factory growth numbers for November were not an outright embarrassment. After the shocker of minus 4.2 per cent growth for October, a growth of 3.8 per cent for November suggests that the industrial downturn is bottoming out. The IMF and OECD are sanguine about India’s growth prospects for 2015. The perception among the investing community is that India will be an outlier among emerging economies, with China cooling off and commodities-driven Russia and Brazil in trouble. Meanwhile, a mild increase in retail inflation in December (5 per cent measured year-on-year, against 4.4 per cent in November 2014) could not have taken anyone by surprise. The high base effect of the previous fiscal had peaked in November 2013, when retail prices were up 11 per cent. Market-watchers have pegged inflation at 5.5 to 6 per cent for 2015-16 — just right to spur business sentiment without hurting consumers.

Yet, it is too early to jump to the conclusion that everything is hunky-dory. The consumer goods segment has been in recession for over a year, an indication that job losses or expectations of job losses are on the rise. In that case, a moderation in prices of essentials may not translate into higher consumption of industrial goods. The RBI’s Industrial Outlook survey for the third and fourth quarter points to a moderation in demand, decline in order books, and an accumulation of inventories. The sharp growth fluctuations in the capital goods segment (negative in one month, positive the next) do not evoke confidence. The factory index is a notoriously fickle number and any uptrend will only be confirmed after a series of readings. It has been trending downward since 2010-11, with minor surprises cropping up now and then.

Besides, geo-political uncertainty can upset a lot of calculations. As a result of falling oil prices, lenders and others invested in oil companies have come under stress. A round of deleveraging cannot be ruled out. The Reserve Bank of India is likely to be alert on this count, even if it is inclined (and rightly so) to cut rates. After all, a volatile currency cannot aid the cause of manufacturing. The onus on reviving growth would have to lie more with the government. While supply-side reforms — with respect to land, labour and simplification of procedures — have been fast-tracked, little attention has been paid to the needs of MSMEs, which account for over 40 per cent of manufacturing output. In trying to restore bank balance sheets to good health, it is important not to tar big and small debtors with a single brush. MSMEs, employing 100 million people, could do with a less stringent NPA regime. Banks should work in tandem with science research institutes and angel funds to incubate talent and facilitate market access. A focus on creating jobs down the line will put industrial growth on a higher trajectory.

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