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Where is the economy headed to? A few indicators have the reply

By TN Ninan
November 07, 2015 18:45 IST

An important indicator is the spurt in indirect tax revenue, along with such industry-specific data as car sales which have finally begun to show serious growth, notes TN Ninan.

Now that a strongly contested state election, with larger national overtones, is behind us bar the shouting, it is time to build on the encouraging fact that the economic signals being flagged through the data stream show a slow tipping of the balance into positive territory.

An important indicator is the spurt in indirect tax revenue, along with such industry-specific data as car sales which have finally begun to show serious growth.

The Reserve Bank's double-step on interest rates (a 50 basis-point cut rather than the generally expected 25 basis points) is a big positive, and reflects growing confidence that inflation is under control.

The buoyancy in revenue means that the government may even have some cushion for increasing expenditure, while staying on the right side of the Budget's deficit projections. Meanwhile, the first sign of improvement in the Doing Business ranking is an encouraging start. Negative data trends have not disappeared; far from it.

Exports have continued to decline, as have imports.

The macro-numbers coming out on investment still do not point consistently upward, while the Nikkei manufacturing purchasing managers' index (derived from a survey of 500 manufacturing companies) reflects a weak recovery; if anything, the last three months have seen a slight dip in the index.

The trend in quarterly corporate results shows no uptick in sales, though profits have improved.

Despite the latter, some industrial sectors are under pressure on pricing and profits because of global commodity price trends, while the below-par monsoon means that the rural areas will see demand being depressed for products like tractors and motorcycles, as well as for a range of consumer products.

As for the most important underlying problem, which is banks' non-performing assets, the worst may still be ahead - despite a rating agency giving a weak thumbs-up last week.

What the situation needs is government focus on the difficult economic issues, with diversionary issues being put back in the cupboard. It helps that the attempts to clear sundry roadblocks are making some, if partial headway.

The policy announcements on dealing with the power sector's financial mess, the new civil aviation policy and the draft of the bankruptcy law - all of these point to issues being addressed, but imperfectly.

Why the very competitive aviation business needs price control or a cross-subsidy is beyond anyone's understanding. And the surest way to ensure that there will not be a repeat problem for power distribution entities would have been to offer them a charge on state revenues before they are disbursed.

The half-way house that is on offer instead may work for now, but will not prevent a repeat crisis in the future.

The attempts to get going with road and rail projects have not yet resulted in measurable action on the ground, but a good deal of preparatory work has been done.

The simplification that has been promised in the tax law - fewer exemptions, with lower rates - is to be welcomed, but tax administration (indeed the administrative system in general) remains essentially unreformed.

On the plus side, the remarkably low prices being quoted for solar power supply are a shot in the arm for the ambitious clean energy programme.

This patchy picture suggests work in progress, with much still to be done.

The elephant in the room is of course the Goods and Services Tax. It is clear that the government will have to reach out to the Opposition, and signal an end to its aggressive, confrontational stance of the past.

The opposition, in turn, needs to offer the minimum degree of cooperation required so that Parliament can function.

The stalling tactics have served to make a point to the Bharatiya Janata Party, which played the same game when it occupied the opposition benches.

But that purpose has been served, and it is time to move on. The country and the economy need purposive politics.

TN Ninan
Source: source