Delusion is dangerous in politics and Arun Jaitley would know it better than anyone else. Yet, the minister, who holds three portfolios in the Narendra Modi government, including the critical one of finance, seems to be showing signs of it.
On 13 January, while speaking at the 14th Financial Stability and Development Council (FSDC) meeting with financial sector regulators in New Delhi, Jaitley took pride in the fact that India is one of the few economies that have a promising outlook and that the economy was moving in the right direction. To be fair, he also said that "growth moderation in the global economy and policy uncertainties among advanced countries pose risk to this outlook," according to an official statement.
His optimism came just a day after the Central government released macroeconomic data, which won't comfort any finance minister. The factory output and retail inflation numbers released for November and December, respectively, indicated that the outlook was far from promising. Both retail inflation and production numbers moved in opposite directions; while retail inflation accelerated to 5.6% in December, factory output (Index of Industrial Production) contracted by 3.2% in November, after having moved up sharply by 9.8% in the previous month. Retail inflation had touched a 14-month high of 5.4% in November, a direct fallout of a spike in food prices.
The IIP data is even more worrisome.
In November 2015, 17 out of the 22 industry groups in the manufacturing sector declined as compared to November 2014. During the period April to November 2015, mining, manufacturing and electricity grew at 2.1%, 3.9% and 4.6%, respectively.
The data needs to be read with the manufacturing survey measured by Nikkei's Manufacturing Purchasing Managers' index and compiled by Markit, for December 2015. For the first time in 28 months, the world's fastest-growing economy saw its manufacturing PMI fall below 50, to 49.1. The reading in November was above the 50-mark that separates contraction from expansion.
The services sector is far from booming, with the Nikkei/Markit Services Purchasing Managers' Index down to 50.1 in November from October's eight-month high of 53.2.
The third quarter GDP numbers are likely to reflect all these and expected to be lower than the 7.4% growth rate registered in the second quarter. It is pertinent here that the Q2 growth rate of 7.4% was led by the manufacturing sector, which grew at 9.3% during the quarter.
Falling exports
The prospects look equally bleak on the exports front. After registering a decline for 12 straight months in a row in November, the government admitted that the full year merchandise exports are likely to fall 13% at $270 billion for fiscal 2016. If it indeed ends up that way, it will be a four-year low. Cumulative value of exports for April-November 2015 was $174.30 billion, down 18.46% from $ 213.77 billion in the corresponding period last fiscal.
Low global economic growth
The weakness in the global economy is here to stay for long, as is evident from the forecast by the World Bank in the first week of January, when it said that growth will be modest in 2016 at 2.9%, from 2.4% last year, mainly due to "anaemic" recovery in emerging markets. The devaluation of the yuan by China could hurt India's competitiveness in world markets. It is worth mentioning here that exports account for about a fifth of India's GDP.
External headwinds do not limit themselves to hurting India's exports. A fall in commodity prices due to a slowdown in China is bound to impact the highly-geared Indian metals and mining sectors, which are finding it difficult to service the debt.
Jaitley's commitment to fiscal consolidation roadmap that binds him to reigning in fiscal deficit at 3.5% of the GDP in FY2017 could well go haywire, given the expected Rs 1.02 lakh crore outgo on account of the implementation of the 7th Central Pay Commission recommendations from 1 April, 2016 with retrospective effect.
Silver lining
The only bright spot in the consumption story is the auto sector, with domestic car sales registering an increase for the 14th month in a row in December 2015. But things could slow down here too, given the ban on sale of diesel cars with an engine capacity of 2,000cc or above, till 31 March, 2016 in Delhi. The full impact will be felt in the current quarter and will be significant, given that Delhi accounts for about 7% of the total passenger vehicle sales in India.
It is difficult to believe that Arun Jaitley is oblivious to all these realities, as he prepares to present his second full-year budget on 29 February, 2016. But it is obvious that the outlook is not as promising as he would like to project. It's time for reality check.
