Mixed bag

Economic data in the past 10 days or so has been very much like the proverbial curate’s egg. On the good side, the country’s merchandise trade deficit — the gap between imports and exports — has shrunk to below $11 billion in August from a peak of almost $21 billion in May. It appears that the rupee’s steep depreciation against the dollar during January-August is finally paying off. Proof of the devaluation effect can be found in the 13 per cent growth in exports and the 10.4 per cent drop in non-oil imports during August. Could this be a signal that the economy’s biggest bugbear — the current account deficit — is beginning to come under some control? This hope may well have played some part in the recent stabilisation of the rupee at Rs 63-64 to the dollar after crossing the Rs 68 mark late last month. A relatively stable rupee, along with the bumper kharif crop that will be harvested from next month, can also help lower inflation expectations.

It is much too early to conclude on the basis of all this, however, that we have returned to a position of macroeconomic stability. While the tensions over Syria may have momentarily eased, the West Asia/North Africa region remains volatile. Any adverse geo-political development there has implications for oil prices, which can reverse the nascent optimism about inflation, the current account deficit and the rupee. But it is possible that the worst period of macroeconomic instability is over.

However, a similar cautious optimism is not warranted when it comes to growth. Industrial production data released on Thursday shows an overall output increase of 2.6 per cent in July over the same month of last year. While this has well exceeded expectations, it is important at the same time to read the fine print. Out of the total 22 manufacturing industries constituting the official index at a ‘two-digit’ level, as many as 12 have registered negative growth. The only manufacturing sub-segment to have recorded high growth (15.6 per cent) in July is capital goods, which is a proxy for investment activity happening in the economy. But here too, if one takes the entire 25-month period from July 2011 to July 2013, 19 months have witnessed a negative year-on-year increase in capital goods production. The current slowdown is basically a story of investments drying up from around the second quarter of 2011-12. This has since percolated to other sectors, including consumer goods and services. What has made this slowdown worse — unlike in 1998-2002, for example — is that it has been accompanied by widening macroeconomic imbalances. Returning to a trajectory of high growth and creating an environment that encourages corporate investment may take a while. But the Government needs to be doing a lot more than it is doing now to make this possible.

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