The Indian economy's 26-quarter low growth of 4.5 per cent in July-September due to poor consumption, demand and investment can be attributed to the dismally low industrial and core sector production for most part of this financial year.
The core sector performance and the index of industrial production (IIP) of the past 4-5 months of the Modi 2.0 (up to which figures have been released) had the tell-tale signs of what the gross domestic product (GDP) growth and weak economic indicators could lead to.
"The budget was a great opportunity to do something, but unfortunately there was no recognition in the government that there was a slowdown," said N.R. Bhanumurthy of the National Institute of Public Finance and Policy.
Government's dismissal
Finance Minister Nirmala Sitharaman, a day after the data showed the economy hitting the 4.5 per cent growth, lowest in over six years, said on Saturday several significant steps in structural reforms had been taken and responses/interventions addressing the needs of the economy would continue -- indicating more relief, if needed.
But she didn't say anything on the 4.5 per cent GDP growth.
Earlier this week she told Parliament, the growth was slowing, but there was no recession. It led to the opposition staging a walkout in protest.
During the day, on the completion of six months of the government, she tweeted: "Today, we mark the completion of six months of the second term of @PMOIndia @narendramodi. Several significant steps in structural reforms have been taken in these months. Responses/interventions addressing the needs of the economy will continue".
What led to the GDP slump?
The GDP figure is an outcome of several months of downbeat figures -- from weak consumer demand and private investment to shrinking factory output and an export slump.
In October, the core sector shrank to 5.8 per cent from the 5.2 per cent contraction seen in September. Steel output contracted to 1.6 per cent against -0.3 per cent, cement to 7.7 per cent against -2.1 per cent, and natural gas to 5.7 per cent vs -4.9 per cent in September.
The core sector had expanded by 4.8 per cent in October 2018.
The eight infrastructure industries -- coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity -- have 40.27 per cent weightage in the IIP.
According to CARE Ratings, negative growth in IIP can be expected for October as it will also counter a very high negative base effect. "The negative growth in IIP can't be ruled out in October given that the core sector has contracted sharply," it said.
The core sector put up the worst show in 14 years, shrunk 5.2 per cent in September, and it's likely to have impacted most the Q2 GDP numbers, according to officials.
According to the Commerce and Industry Ministry, the core sector production fell in September. Coal contracted the steepest 20.5 per cent, fertiliser being the only exception. The figures for the year-ago month stood at 4.3 per cent. The cumulative growth in H1FY20 was 1.3 per cent.
In May, the growth of eight core sectors improved to 5.1 per cent, helped by rise in steel and electricity output. In July, the core sector output remained weak with growth slowing to 2.1 per cent over the year-ago month as coal, crude oil, natural gas and refinery items output declined.
In August too, the output of eight core sectors declined 0.5 per cent. In April, the core sector growth slowed to 2.6 per cent.
In Q1FY20, the cumulative growth of the core sector was 3.5 per cent, 0.2 per cent higher over the year-ago quarter.
The core sector production contracted to over three-and-half year low of 0.5 per cent in August after growing 2.7 per cent in July -- that too when the government revised upwards the sector growth for July to 2.7 per cent from 2.1 per cent.
In September, IIP contracted 4.3 per cent, the steepest fall in 8 years. Production for the mining, manufacturing and electricity sectors for September stood at 86.5, 126.5 and 158.7 respectively, with the corresponding growth rates of -8.5 per cent, -3.9 per cent, -2.6 per cent against the year-ago month. The contraction was mainly due to the underperformance of the mining and electricity sectors.
In August, industrial growth shrank 1.1 per cent after 26 months, reinforcing fears of a slowing economy and deteriorating consumer sentiment. In July, however, IIP growth had risen to 4.3 per cent.
It had posted a very low growth of 2 per cent this year after the contraction in manufacturing, capital goods and mining hit factory output against a 7 per cent growth recorded in same month of FY19.
In May, industrial output had slipped to 3.1 per cent after growing 3.4 per cent in April.
"The government has to be sector specific in its policy response. Policymakers will have to look for innovative ways (both the government and the Reserve Bank of India) as the marginal utility of conventional policy response functions has started to diminish significantly," said Edelweiss Securities economist Madhavi Arora.
