CEA stokes hope

Asian Gloom
By Shivaji Sarkar

After a long time Chief Economic Advisor Surbramanian Krishnamurthy has given a boost to the confidence of the nation with his assertion that the Indian economy is poised to grow, as macro-economic fundamentals are strong. The CEA is categorical that the country has the capacity to march on despite withdrawal of stimulus globally.

He expects a double-digit growth – though it would be on minus 23.9 percent growth of 2020-21. It is reassuring for a nation that has stagnated for almost 18 months on a decelerated growth during the previous two years. At this stage any positive growth boosts the confidence of the businesses and creates a favourable political atmosphere.

The Economic Survey (ES) estimated a growth of 11 percent and the budget 10.5 percent. UN ESCAP predicts a troubled ‘K’ shape recovery. The latest RBI Monetary Policy puts it at 9.5 percent. And the first quarter recovery is stated to be 21.4 percent, an improvement over the forecast made in June over the 18.5 percent. The CEA, however, is modest and says that the growth will be higher than pre-COVID-19 level and possibly “the budget and ES predictions should be achieved”.

The nation hopes that it comes out of a negative psyche and sprints on. The first sign has come with the eight core sector continued expansion of 9.4 percent. The CEA says that he agrees with the April-June quarter growth rate. There is a base effect, he adds. At the same time, it has happened during a much more intense second wave. There is across the board improvement in a lot of high frequency indicators.

The recovery is “V” shaped, he says and would continue to be so. He revels on the 49.6 percent year-on-year growth of the manufacturing sector compared with a 36 percent contraction last year. The construction grew 68.3 percent. even farm sector did better in Aril-June with 4percent growth and against 3.5 percent posted earlier.

What Subramanian indicates is that the nation has come out of a gloomy period and now is poised grow positively. He does not disagree with some hiccups but the 9.4 percent recovery of coal, crude oil, natural gas, petroleum & refinery products, fertilisers, steel, cementand electricity is far better than contraction 7.6 percent in June 2020. The core sector has maintained the growth for the fifth consecutive month.

There are positive indicators but still a lot needs to be done as overall there is a financial crunch and the budget deficit at the end of July was at Rs 3.2 lakh crore – 21.3 percent of the full year target. It is stated to be modest as the figure a year ago was Rs 8.2 lakh crore and pre-covid level of 5.5 lakh crore.

But there are other problems. The GST realisation and other revenue realisations are lower. The economy has not yet come back to health so that revenue realisations, key to further recovery, grow at healthy pace. Personal citizen economy is still not in a happy state with loss of jobs, wages and salary cuts. This also affects purchasing capacity, a necessity for increasing market activities. Besides, repeated and sporadic surge of the pandemic fears often put activities at bay.

The private equity and venture capital (PE-VC) deals have tapered in early August despite a bullish stock market crossing 57000 points at the sensex. It has raised questions on the nature and quality of investments. Total PE-VC deals were 112 against 126 in July. Despite optimism, the investors are yet shy of entering into deals as the investors have still problems of cash flow. Investments flows are dependent on how the line-up IPOs performed. The liquidity has not hit its peak yet. There are more offers for sale and the buyers are not revving up to the offers.

Another not so good indicator is the diesel sales. It has recorded the sharpest fall in monthly sales since May. It is ascribed to monsoon conditions having hit demand from the farm, trucking and construction sectors majorly. August data show minor gains in sales over 2020 but it remains 9.7 percent less than 2019. Even LPG sales fell marginally – 1.7 percent less than in July 2019 and 2.4 percent less than August 2019. This shows that at the household level the recovery is not bright. All eyes are fixed on the ensuing festival season when overall activities and demand are expected.

So amid this scenario 4 percent dip in GST is not surprising. The July collections were Rs 1.16 lakh crore. It dipped to Rs 1.12 lakh crore in August. July collections were 30 percent higher than last year and 14 percent more that in 2019. On an average, except in June, the collections were over Rs 1 lakh crore a month. The compensation formula for the states will be decided on September 17, when the GST Council would meet in Lucknow. Still experts are cautious on the recovery path indicated by the moderation in the August purchasing managers’ index (PMI). Overall unless the individual financial status improves, the demand would continue to vascillate.

The UPI transaction value officially is showing improvement but during June to August it has decelerated. The growth rate of transaction value also moderated. There are also apprehensions that even the actual transactions show are not real in many cases.

Overall manufacturing activities are hit by PMI. It hovers around 52.3 in August. The 50 point mark the separates the contraction from expansion. It is an indicator that not everything is that glorious as is made it out to be.

Global and Asian trends are yet not positive. Japan government offered a bleaker view of the economy in August. It says the downside risk is heightening – it means overall growth is falling though for August.

Overall Asian economy sees the corporate profits declining, falling sales of cars in China and Toyota cutting September production. Factory activity in the Asia Pacific contracted sharply in July. There are signals of slowing down in southeast Asia and Pacific. Asia’s largest firms are likely to post profit decline of 6.2 percent, according to a calculation of Refinitiv Elkon.Amid such scenario, the CEA’s statement keeps hopes alive for Indian economy. The market would like to see Subramanian’s prediction coming true despite all odds. Would it happen? — INFA