For monetary and fiscal policies, growth is the laggard

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When the Reserve Bank of India (RBI) kept its policy rate unchanged with a more moderate inflation outlook than markets believed or analysts anticipated, it was a big surprise. The central bank had been widely expected to start normalising its pandemic policy rate settings at the February 10 review.

On February 1, the government laid out next year’s fiscal policy with a 50-basis point reduction in the deficit indicating slower retrenchment in order to push growth with big capex. The macro framework suggests tightening and/or sharp consolidation could be an overreaction, that demand is a damper with a weak recovery offering little potential if any for the costs-induced inflation to take hold.

Time will tell what’s correct. Against the intensifying macro uncertainties, geopolitical developments, oil price gyrations, and inflationary pressures at large overseas, growth may well turn out the laggard ahead. Trade-offs can reverse with macroeconomic outcomes, as sometimes happens in highly uncertain times.

Forget about inflation for now — we are pre-warned about this quarter while the next one is still distant. Consider growth for the moment. It is interesting to examine its evolution through the lens of recent, post-policy data that shines some more light on these doubts or questions.

What’s the picture? Turns out this is not so inspiring if we look at last quarter’s economic performance.

Corporate performance is a good starting point. Quarterly results for more than 3,000 companies reinforce the previous quarter’s trend: the earnings-lead of cyclicals, i.e., financial, metals, mining, oil and gas, while manufacturers struggled with low sales and revenues, falling margins resulting in slowest growth in net profits (1.8 percent year-on-year) in one-and-half years.

December’s industrial output data underlined this with 0.4 percent growth, several notches below consensus (1.5-2 percent). In the full quarter, industrial production grew 1.9 percent over the previous year, and 3.7 percent upon the pre-pandemic quarter of December 2019. Capital goods output, which reflects investment trends, contracted -2.7 percent y-o-y, and -3.4 percent over the same pre-pandemic period.

The troubling weakness in consumption was reflected in 0.3 percent rise in consumer non-durable goods, and a -4 percent contraction in durable goods that betrays discretionary spending remained depressed in a festival, post-wave reopening quarter. Both consumer goods categories averaged 3 percent rise upon the pre-pandemic quarter.

These indications are more telling when seen together with trends in goods’ trade. Exports growth (non-oil) was strong at 25.4 percent in the quarter, and stronger compared to pre-pandemic (29 percent) levels; the pace has moderated in January, but still far above that two years ago. Non-oil imports match the briskness of exports due to demand for intermediate inputs.

The impetus from domestic demand seems barely present; overseas demand is all that’s keeping industrial growth afloat or above zero in the post-second wave recovery. The data on capacity use in manufacturing is not yet available for the last quarter, but the slack in September 2021 equalled that in October-December 2020; a big improvement in December 2021 quarter may perhaps be unlikely seeing the industrial output outturns in the period.

What about the financing? Bank credit spurted to 9.3 percent year-on-year in December from 7.1 percent the previous month; for the whole quarter, it rose 7.8 percent. This is subject to two caveats: in real and retail inflation-adjusted terms, the rise is 2.7 percent for the quarter and 3.6 percent in December; a GDP-deflator adjustment for broader representation of economic activity implies more weakness. Two, it’s unclear how much of the increase in bank credit is due to substitution of funds — market rates rose in the past quarter, shifting demand for bonds towards bank loans. Corporate bonds outstanding almost halved to grow 4.3 percent in October-December 2021 compared to 8.7 percent in the previous quarter. As there’s been no update from the central bank on total financial resource flows (i.e., banks, non-banks, external, etc.) to the commercial sector in the regular publications, it’s hard to gauge trends in aggregate resources mobilised in the economy.

Overall, the past quarter was expected to show strong rebound after the second wave but the performance has disappointed; the comeback is weak in comparison to the previous year’s post-wave recovery too. Omicron impacted little in December; its effect is felt more this year, another reason for pushing out monetary policy normalisation. Whether the predicted real GDP growth of 9.2 percent in 2021-22 will be realised or undershot is a fair question to ponder in this context.

Next year, real GDP is anticipated to grow 7.8-8 percent. It remains to be seen if inflation proves more stubborn and less transitory than foreseen. Global inflation, for instance, could continue hardening, stay elevated, putting upward pressure on oil and commodity inputs, and importing inflation. Stronger growth may also allow firms to pass over cost pressures to consumers, though the RBI thinks so not because of weak demand. It would be worrying if inflation falls because of a slowing economy.

Renu Kohli is a New Delhi-based macroeconomist.

Views are personal and do not represent the stand of this publication.