Govt must act fast to spur private investment

The Central Statistical Organisation’s data on lower industrial output and higher CPI inflation is a matter of concern. It’s also a hot potato for Prime Minster Narendra Modi as it shows the state of an economy that has a long way to go to achieve a sustainable growth path. Industrial output fell to a seven-month low of 3.2 per cent in May, against 4.8 per cent in April. The biggest hit was taken by manufacturing, which recorded growth of 2.8 per cent, against 5.3 per cent in April. Manufacturing is a vital job creator that has to be backed up by demand, which in turn is created when consumers have purchasing power.

Mr Modi, by his inept handling of the economy, and failure to control inflation by rationalising taxes on imported fuel, has squandered away some of the popularity that had catapulted him to power. His popularity dropped from 36 per cent of the electorate to 34 per cent. The general election is just a few months away and Mr Modi is running out of time to rectify matters. One hopes he isn’t lulled into complacency by the stock markets’ buoyancy — it’s well known that the stock markets’ rise and fall aren’t entirely dependent on the real economy. They are moved by sentiment and speculation. The recent rally that saw the Sensex zoom to a lifetime high of 36,548 was due to mutual funds pumping in Rs 68,000 crores since January. This somewhat neutralised the effect of the withdrawal of Rs 49,000 crores (equity and debt) from Indian markets by foreign portfolio investors since January 2018. FPIs find Indian equity markets overpriced and thus unattractive. Besides, with external factors like US President Donald Trump’s tariff war with China and rising crude prices, FPIs prefer the safe haven offered on home turf to the risky emerging markets. America’s rising interest rates are also a magnet for FPIs.

Mr Modi would do well to remember what former finance minister P. Chidamabarm said about prices — that he wouldn’t lose sleep over the stock market as he was more worried about Khan Market (New Delhi’s upmarket shopping location). It shouldn’t be so difficult for the Modi government to rectify matters as the reasons for the economic slowdown are known and await a resolution. He has in his favour the spill-over effect of the Seventh Pay Commission and a good monsoon that could boost rural India’s earnings and spur consumption demand, which could provide the fuel for industrial growth. Companies in some sectors like consumer durables will be able to utilise their idle capacity (estimated at around 30-50 per cent) and reduce their inventory, that in the long run will lead to more private investment. The government must provide a business-friendly environment, which would also revive private investment. At present, it is primarily government spending that is fuelling the economy.