Last week’s foreign trade and industrial data present a mixed picture about the Indian economy. Exports have grown by 11.15 per cent year-on-year in September, marking the third successive month of double-digit increase. This suggests a turnaround in one of the three major contributors to growth. Till the first quarter of this fiscal, none of the three — the other two being investment and consumption — displayed signs of revival, pointing to the absence of any growth impulse. The pick-up in exports since July is partly on account of the recovery in markets such as the US and Japan. But it is mainly a result of greater competitiveness on account of the rupee's slump.
But exports, including IT services or other ‘invisible’ receipts from remittances and tourism, constitute just over a quarter of India’s GDP. Also, whether export growth can be sustained depends on external factors, in the short term, the outcome of the US Congress battle over the federal debt ceiling. While a US debt default is unlikely, the possibility there will be spending cuts as part of a deal reached by lawmakers cannot be ruled out. Such cuts, to the extent they dampen the ongoing US recovery and overall global economic sentiment, will adversely affect our exports. Growth in the Indian economy cannot, therefore, be export-led beyond a point. A genuine recovery can happen only with a revival in the other two domestic growth drivers: investment and consumption. The picture here is far from rosy. The index for capital goods production — a proxy for investment activity in the economy — has fallen by 2 per cent in August over last year. This index has seen negative growth now in 20 out of 26 months since July 2011. The deceleration in consumption is somewhat more recent, with growth in the consumer durables index in the negative or low- positive territory since July 2012.
The current slowdown is over two years old, if dated from the time investments began drying up. These spilled over a year later to consumption, as incomes and job growth were also hit. The revival in exports is certainly welcome, not the least for reducing a widening current account deficit and stabilising the rupee. Together with a bumper kharif crop, we can hope for some containment of price rise and anchoring of inflationary expectations. But neither exports nor good monsoons can address the root of the slowdown, which lies in no new greeenfield projects coming up on the ground. Only when this starts happening can we say that the economy is firmly on the road to recovery.