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The lingering frost

Venky Vembu | Updated on February 28, 2020 Published on February 27, 2020

Shoot out: There is as yet no compelling evidence that the economy has bottomed out   -  ISTOCK.COM

Why the ‘green shoots’ of a springtime economic recovery may be signalling a false dawn

A heart bowed down by the weight of woe will likely cling to the weakest hope. After a winter of downbeat prognoses, policymakers, economy watchers and commentators have begun sighting the ‘green shoots’ of a springtime economic recovery: They have begun talking up the prospects of an uptick, and claiming that the worst of the downturn is behind us. There is, of course, anecdotal evidence to suggest that some sectors of the economy have seen a bit of a rebound in recent months, but the eagerness to extrapolate from those data sets in order to paint a rosier picture of the economy may be suggestive of a creeping weariness. The government may be shy of acknowledging the intensity of the downturn — after all, an entire Budget speech, and the longest one to boot, went without invoking the word ‘slowdown’ — but it has not been inhibited about pulling out the heavy armoury to address it. And, yet, the engines of the economy have not quite warmed up to these ministrations in the way that had been expected.

Worse, behind the closed doors of the chambers where Reserve Bank of India (RBI) officials formulate their arcane policy, there is a growing acknowledgement that — notwithstanding the sightings of the ‘green shoots’ — there is as yet no compelling evidence that the economy has bottomed out. And that the few hope-inducing data sets are not entirely representative of the state of the broader economy. And while monetary policy mandarins stand ready to stimulate the economy, data in respect of the underlying inflation limits their capacity to respond with traditional interest rate interventions.

Which is perhaps why the RBI has forayed into unconventional monetary policy spaces to get money flowing through the economy. The so-called long-term repo operations to inject liquidity in the banking system, however, have had only mixed results in the geographies where they have been tested. For instance, while such measures did lead to lower lending rates in some countries in Europe, loan growth remained weak as larger corporates borrowed cheap to invest in higher-yielding bonds. That response is symptomatic of a larger problem: Credit effectively flows not to those who need it the most.

That may well explain much of the consternation in policy circles, which is centred around why the economy has responded, at best, haltingly to the various stimulus measures. Even when policy stimuli — of the sort we have seen over the past year — are well-intended, there is no certainty that they will always have the targeted effect. Even the dramatic lowering of corporate tax rates last year, which was intended to incentivise companies to make capital investments and set off a virtuous cycle, has not worked as expected for the reason that they would like to see consumption demand pick up before they commit yet more money. And evidence that households are ready to loosen their purse strings and spend is somewhat scarce on the ground. Observers of high-frequency data have noted that the elements that drive durable economic growth are not in place. And weak job creation continues to weigh down private consumption demand.

The scurry of activity to secure a lifeline for the telecom sector, which finds itself virtually arm-twisted into coughing up hoards of cash, points to a realisation that the consequences of a pile-up of bad assets in the banking system are hard to work off. Banks’ exposure to the sector are under scrutiny, which compounds the misery they face with potential defaults by credit-starved real estate developers and micro enterprises. The cycle of bad news on this front has not played itself out fully.

As if all these homegrown factors dragging down growth were not enough, the global outlook has turned decidedly grim owing to a ‘black swan’ event: The spread of the coronavirus epidemic from China. The impact of the virus relates not just to human casualties — tragic as they are — but also the expected disruption in global supply chains as a consequence of the protective walls that the epidemic has induced. India is, of course, relatively less vulnerable on this count: It is not an active cog in that supply-chain wheel, and Chinese nationals account for only 2.7 per cent of visitor arrivals in India. Nevertheless, it will likely face a serious disruption in its imports, given that China accounts for 14.2 per cent of it. That in turn will affect key industries in the electronics, engineering, pharmaceuticals and automobile sectors.

Economic Cassandras, who take their jobs as practitioners of the Dismal Science a trifle too literally, are already conjuring up a series of what-if scenarios. In the ‘base case’ scenario, they reckon that weak global growth owing to the virus outbreak will reduce India’s GDP growth just a tad, but with a somewhat more deleterious effect on the fiscal deficit target. In a ‘bad’ case, where the impact is more virulent, growth will dip even further. But in the ‘worst-case’ scenario — which would impact India not just indirectly through a slowdown in global growth, but much more actively, with increased contagion within our shores — growth could slump to as low as 4 per cent in the first half of 2020.

Which means that a recovery, much less a rebound, could be pushed much farther out. The ‘green shoots’ that we see today may at best be signalling a false dawn.

 

Venky Vembu is Associate Editor, BusinessLine; Email: venky.vembu@thehindu.co.in

Published on February 27, 2020
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