There are two striking aspects to the HSBC Purchasing Managers’ Index report for India, a robust measure of economic activity that is based on monthly surveys of private sector companies. First, the Composite Output Index registered a contraction in July, signalling an overall decline in the private sector. The fact this has happened for the first time since April 2009 shows that the Indian economy is pretty much in the same shape it was after the 2008 global economic crisis. If anything, it may be even a tad worse, which brings up the second point. Within the ‘composite output’, it is the services sector index that has really shrunk. What this means is that the economic slowdown is no longer confined to manufacturing or mining. This is unlike 2008-09, when the services or tertiary sector grew by over 9 per cent despite a slump in manufacturing and mining.

The HSBC PMI data is also in line with other indicators that corroborate a slowdown on the services front. The sales of trucks and light commercial vehicles during April-June are down more than 8 per cent compared to the same quarter of last year. This is clearly a result of low demand for transport services because of reduced industrial and other ‘tangible’ commercial activity. Commercial real estate – office spaces and malls – has been languishing for over a year now. But there are increasing signs that this sluggishness is extending to residential realty, going by the reports of falling sales of new homes and burgeoning inventories in major cities. The overall decline in consumer spending is reflected in the negative growth in domestic airline passenger traffic as well.

That services haven’t been spared from the effects of the current downturn, unlike in 2008-09, shows how serious the problem is. But it also confirms that the single biggest problem faced by the Indian economy today is not the rupee or inflation, but growth. One hopes that the newly appointed Reserve Bank of India Governor, Raghuram Rajan, will make growth the focus of monetary policy and allow the rupee and inflation to take care of themselves. The rupee’s slide to new lows is proof of the ineffectiveness of tight money in controlling exchange rate volatility. The economy needs a strong dose of interest rate cuts and public investment (through a redirection of resources from subsidies and other wasteful government spending) to infuse liquidity into cash-strapped companies and restore consumer confidence. These measures are necessary, at least in the short term, to revive spending and get the wheels of the economy moving again.

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