India’s economic growth has lost momentum, but weak corporate profits keep the engine running

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Jhe signs of an economic slowdown are inescapable. Whether it’s industrial production, electricity generation, exports or Goods and Services Tax (GST) revenues, there is a loss of momentum.

Some indicators claim to be misleading, such as bank credit, which is growing by around 14%. But when wholesale price inflation is 12.4%, much of the growth simply reflects general price increases.

Take the example of merchandise exports, which have maintained initial momentum from last year’s surge. But by September, they had not only lost that momentum, but were also down 3.5% in the month. The details were even more disturbing. Exports of mechanical goods fell in September by 17%, while textiles (threads, garments, clothing, etc.) fell by 31.5%. The strong increase in exports of electronic goods (a massive increase of 64%) could not completely make up for the lost ground and, in any case, this sector has a lower national added value.

Overall result: the merchandise trade deficit for the first six months has almost doubled. The larger current account deficit (including trade in services) for the year as a whole is expected to reach by far the highest level in a decade.

The story of electricity generation is the same as that of exports. The numbers were up in the first few months of the year, but by August the growth had petered out and the numbers were virtually flat. This needs to be seen in the context of electricity production last year (2021-22) having been only 1% higher than four years earlier, in 2017-18.

As for the index of industrial production, the growth in July was 2.4%, while the growth of production in the “basic sector” (steel, cement, fertilizers and the various energy activities) in August reached a nine-month low of 3.3%.

The GST figures are also revealing. After revenues of 1.68 trillion rupees in April (reflecting the annual rise in production in March), the figures for the following months were 1.41 trillion rupees, 1.44 trillion rupees, 1.49 trillion rupees and 1.43 trillion rupees. Inflow in September is projected at Rs 1.45 trillion. It couldn’t get any flatter than that.


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IIf the economy stabilizes, how can the sharp increase in the collection of direct taxes be explained? One reason for the bright spot on an otherwise darkening horizon is that corporate profits continue to grow, although escalating costs mean margins have been squeezed to their lowest level in nine quarters.

April-June figures for nearly 3,000 listed companies showed net profit growth of 22.4%, but that was boosted by improving health in the financial sector. Exclude that and the figure was down to 16.3%. Additionally, earnings growth was concentrated in a half-dozen large companies that accounted for most of the increase. Note that the main stock indices are now lower than a year ago, while the rupee could weaken further.

Much (not all) of the bad news is due to external factors: high oil prices, supply disruptions, flight to the dollar and global economic slowdown. But we are in a difficult world and growth expectations must be tempered.

It is difficult to reconcile the picture painted by the various figures with the (slightly lowered) forecast of the Reserve Bank of India for growth of 7% for the year as a whole. The World Bank will be closer to the truth with its revised forecast of 6.5%.

Meanwhile, the central bank is caught in the grip of high inflation and low growth. Ten-year Treasury yields have climbed over the past year from 6.27% to around 7.45%, putting them roughly in the middle of the yield range over the past decade. If yield increases further as the RBI fights inflation, more steam will escape from the growth engine. To counter this, and aided by fiscal dynamism, the government can borrow less from the market and control interest rates. But don’t be surprised if growth in the second half of the fiscal year falls below 4%, matching its level in the year before the pandemic.

By special arrangement with Business Standard


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