What the fall in IIP numbers means for Indian economy

The fall in the Index of Industrial Production or IIP in April, as revealed by goverment data released last Friday, seems to confirm the concerns raised by several economists ever since the government announced India's GDP growth 7.6 per cent for 2015-16.

Industrial output, measured by Index of Industrial Production (IIP) came in at - 0.8 per cent for the month of April.

For March, the IIP had fallen by 0.1 per cent. This was below the expectations of market analysts who expected IIP to grow by around one per cent. A below par performance of the manufacturing and mining sectors, and a decline in capital goods output have been cited as reasons for a fall in the IIP numbers.

When the GDP numbers came out, there was a concern among many who track the Indian economy that the growth was led by a growth in consumption, without any real growth in certain other parameters that are vital to asses economic growth.

These included bank credit offtake and private investment in projects, performance of corporates, auto sales, factory output and performance of the manufacturing sector, including exports.

In the January-March quarter of fiscal 2015-16, bank credit or disbursement of loans of public sector banks grew by a mere 1.4 per cent, compared to 7.8 per cent in the corresponding quarter of fiscal 2014-15.

Although much of this could be attributed to a process of cleaning up of bad loans in state-owned banks that has hit their bottomline and made most of them, except the State Bank of India, not to lend further, weak demand and the ensuing corporate slack in credit offtake have been the major spoilsport, and that does not seem to turnaround so soon.

Many believe that private investment would be the last piece that falls into place, since many other things have to be first sorted out before people start to invest in a big way. Passenger car sales in India declined marginally in May this year, although that can be attributed to a shift in preference for some of the newly launched utility vehicles (not to miss, therefore, that overall auto sales has improved).

However, there is a continuing slowdown in the rural areas that has impacted sales of entry-level hatchbacks. Similarly, in April 2016, India's merchandise exports fell by 6.74 percent around $20 billion, continuing their downtrend for the 17th consecutive month.

On the other hand, the positives for the economy have come in from better cement dispatches pointing to a revival in construction, better corporate performance for the fourth quarter of the previous fiscal, and higher power production.

So what is it that can revive the investment activity, and strengthen the credibility of the GDP growth numbers? One, of course, is mending India's banking sector, and to do that ensuring an unhindered continuity for the present governor to carry on the reforms he has initiated, including cleaning banks' books.

The other is improving business confidence, which is at a low ebb today, by simplifying the tax structure (the implementation of the Goods and Services Tax will play a big role here), lowering interest rates (which again is determined by inflation levels, but the consensus is that the RBI will reduce rates in August), reforming labour laws (where a few measures have been taken, including the Bankruptcy Law, and their impact is awaited).

Many would also like to see the government further loosening its purse strings to boost public investment in projects, and not really wait for private investments to come in, and an exports push.

It may be futile to harp on a good monsoon reviving growth, since a bad monsoon hasn't seriously harmed growth either, so their co-relation may not be as significant as is made out to be.

A concerted and sustained effort on all these parameters should pack more punch behind the country's GDP numbers and put it firmly on a growth track.