Saturday, 3 June 2017

The Indian Economy - Detailed MacroAnalysis, Supply Side

As we move towards the GST implementation, the prospect of an economic distress is becoming increasingly evident, at least from a variety of economic indicators. The extreme-right wing is quick to point out the GDP Growth which is still among the better rates in the world & the numbers from Agriculture as proof that all is well; and add to this potpourri the rising stock market, laying claim that all is well with the Indian Economy. The other side is equally quick to point out the slowing GDP numbers from Q4-17 as proof that all is not well.

As a middle-roader, it seems evident to me that despite all the good that has taken place, as well as the systemic changes implemented aka the GST, The reality is quite different, and calls for some deep soul-searching. A look at the complete picture, far from inspiring confidence in the state of the Indian Economy, actually raises a series of questions, and some serious doubts over the near to mid term. Over the long term, a positive outlook is pretty much a guarantee; the trick is getting to the long term, which poses some serious and deep questions.

Gross Fixed Capital Formation
First, the investment numbers. Gross Fixed Capital Formation is at a slow point, which is a cause for serious concern. Not only is it slow, but it has been slowing for 4 years now – 2013 {Refer the chart below for details}. This is a vital point, for this means that the issue isn’t bad policies by the current Government; but rather the issue actually is an economic slowdown that s responsible. Other charts we look at will no doubt establish this general slow-down in the Economy, which has generally gone under-reported.

GFCF


What is GFCF? As per Economics Help, Gross fixed capital formation is essentially net investment. It is a component of the Expenditure method of calculating GDP. To be more precise Gross fixed capital formation measures the net increase in fixed capital. Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is taken away from the total. Thus, a slowdown in this is a cause for concern!

The Index of Industrial Production (IIP)
Next, let us look at the IIP : The Index of Industrial Production (IIP) is an index for India which details out the growth of various sectors in an economy such as mining, electricity and manufacturing. Here again, the Graph shows a worrying trendline, as can be clearly seen in the chart given below. This is notwithstanding the change in the baseline that effected; the higher numbers of the new series would automatically be higher for the older numbers as well.



The Purchasing Manager’s Index
Add to this the PMI – The Purchasing Manager’s Index, which is The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. Here again, the trendline can be seen since 2013 or thereabouts, showing increasing stress in the manufacturing sectors of India. Note that a figure below 50 can be interpreted as less than half the purchasers are not too gung-ho about economic prospects.



Credit Growth
Add to this the figures for Credit Growth, and things get really serious : this is the rate at which the bank lending to business grows vis-à-vis the same period last year. This rate is at its lowest in the past several the interested to check for themselves. It can be seen that there has been a long-term degrowing trend starting 4 years ago – again, as in all charts above, making this article a simple economic analysis, and not a comment on this Government.



Gross NPAs
Lastly, let us take a look at the graph of NPA of Indian Banks. This once again shows a rising trendline, extending back 2-3 years and more. While this deserves a more detailed look, to be taken up later, again the overall picture this trendline poses does not inspire confidence.



Putting it all together
Put it all together – IIP, PMI, GFCF, NPAs, Credit Growth – all are showing a decreasing trendline. In almost all, the trendline extends beyond 2014; in almost all, the trendline in the tenure of the current government clearly shows little impact as of now, as can be seen from the graphs quite clearly. These are key economic indices – Industrial Production, Purchasing Managers, Gross Investment in Fixed Capital, Non-Performing Loans, Credit offtake from banks all are signs of healthy economic activity. And in each and every case, the trendline is not one that inspires confidence. This is just the supply side of the equation – the demand side has an equal number of stunning surprises, as I look at PCFE, GCFE and consumer sides in the next article!

Thus, as of now, there is little to celebrate for the extreme-right, right, left or centre wings. The ground reality is that the situation is worrisome, and the interventions of the current government is not yet giving results. With the GST now coming in, the hope is that this will turn things around – but will it solve the core issues that has led to these graphs above? Why has this happened? For that, a deeper analysis is required. But, for now, let us keep in mind that, notwithstanding the GDP growth rate we are all crowing about – the situation a dicey, requiring hard work, and some serious intellectual thinking for solutions!


References: Trading Economics, and Capitalminds for graphs, charts and numbers

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