Economic weather warning

Source- The post is based on the article “Economic weather warning” published in the “The Indian Express” on 11th May 2023.

Syllabus: GS3- Indian economy

Inflation– The MPC (Monetary Policy Committee) meeting gives the impression that inflation is well under control. This is good from a policy stance but is worrying for households. They are facing a relentless increase in the prices of goods and services.

They have experienced a cumulative inflation of over 18% in the last three years.

Growth– The growth picture is also ambivalent. India is among the fastest-growing economies at 6-6.5%. But this picture too is different when looked at from a medium-term perspective.

There is not too much optimism about being on track for the 8% plus growth rate. The new normal appears to be 6-7%.

Exports– Policymakers are satisfied with new heights achieved in the exports of goods and services. Services have gone against the trend of the global slowdown in 2022. But exports of merchandise are not too satisfactory.

For example, if refinery products are excluded from the export’s basket, there has been a fall in FY23.

Production-Linked Incentive (PLI) scheme aspires to make India the centre of all global chains. It seems to be only an aspiration as of today.

Indian exports are linked with global growth and a slowdown is not good for them. In 2022, higher crude prices got reflected in both imports and exports.

Investment– The investment picture has two sides as well. The official position is that investment is picking up in the private sector. It should get reflected on the funding side.

In the investment conclaves, major companies show a lot of interest. But, signing MoUs means little when not converted to action.

Data on all funding sources show that there is a slowdown. Bank credit is buoyant more on the retail end than manufacturing. Debt issuances are dominated by the financial sector. Manufacturing is still lagging.

External Commercial Borrowings have slowed down mainly due to the higher cost of loans.

Consumption– The consumption picture is also fuzzy. There are reports of rural demand being good in FY23. But, it is not reflected in the production of consumer goods.

The 16% growth in nominal consumption in FY23 would tantamount to just 7% in real terms, as inflation has pushed up costs. And this was also brought about by pent-up demand for both goods and services post the full removal of the lockdown in 2022.

Employment– A growing economy needs to create more jobs if consumption and investment have to be sustained. As per CMIE data, the average unemployment rate is around 7.5%. It can now be considered the natural rate of unemployment in India.

There are concerns related to the labour participation rate. It has come down  from 46.2% in FY17 to 39.5% in FY23. It indicates a growing population in the working age group that is not interested in working.

There has been a series of layoffs in several IT and fintech companies. The promise shown by start-ups has not yet been realised and hence.

Banking– The bright spot in this picture is the banking sector. The cleaning up operations and slowdown in the economy has helped the banks, especially in the public sector, to emerge stronger.

NPA levels have come down and banks are well-capitalised. Also, profitability has improved. Quality of assets means lower provisioning for NPAs.

When the economy gets into the take-off mode, banks will be well equipped to provide the funds. This was not the case 4-5 years ago.