- India’s real (or inflation-adjusted) GDP grew at 5 per cent in the June 2019 quarter of financial year 2019-20 (Q1FY20), the slowest growth in six years (25 quarters).
- With GDP growth falling consecutively for the fifth time, India has slipped to fourth position globally in terms of real growth rates.
- The Indian economy is now behind China, the Philippines and Indonesia as it recorded 5 per cent growth in the first quarter of FY20, the slowest in last 25 quarters.
- This is only the second instance since December 1999 that the GDP growth rate has fallen for five straight quarters.
Dissecting India’s slowdown
- Growth is a function of consumption, investment, government demand, and net exports.
- A slowdown in consumption demand, decline in manufacturing, inability of the Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner, and rising global trade tension and its adverse impact on exports are some of the factors affecting India’s growth.
- Two of the government’s most famed economic reforms–demonetization and GST implementation–have been identified as major factors behind the slump in growth in many reports and surveys.
- Medium and Small Scale Enterprises (MSMEs), the backbone of multiple Indian sectors, are still suffering from the combined consequences of both the reforms.
Key indicators signifying slowdown
- The agriculture sector is in distress; the rural economy is struggling from very low inflation resulting in stagnant income.
- Urban wages are either stagnant or decreasing due to less demand but more supply of unskilled labour.
- Price of agricultural products is stagnant, resulting in farm distress and fall in income and consequent fall in purchasing power—which is directly related to lack of demand.
Domestic car sales
- During April to June 2019, car sales fell by 23.3% in comparison to the same period in 2018.
- This is the biggest contraction in quarterly sales since 2004.
- A slowdown in car sales negatively impacts everyone from tyre manufacturers to steel manufacturers to steering manufacturers etc., when it comes to the backward linkages that car manufacturers have.
- As far as forward linkages are concerned, many auto dealerships are shutting down or shrinking.
- As per a report, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of 7% from March 2018, when the number was at 1.2 million.
- This means that builders are building new houses at a faster pace than people are buying them.
- The real estate sector has forward and backward linkages with 250 ancillary industries.
- So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too.
- The fact that real estate prices haven’t gone up in years makes people feel less wealthy and as a result spend less.
- The volume growth or the number packs sold, of fast-moving consumer goods (FMCG) companies has slowed down over the last one year.
- If we look at Hindustan Unilever Ltd, the volume growth between April and June 2019 was at 5%. It was 12% during the same period last year. There are other examples as well.
- Dabur India posted a volume growth of 6% during April and June 2019, against 21% last year. Britannia was down to 6% against 13% last year.
- Indeed, this is worrying, given that people seem to be going slow on making everyday purchases.
Final consumption of finished steel
- Creation of any new physical infrastructure requires steel.
- Hence, a faster increase in steel consumption than in the past shows increased investment activity than in the past.
- The consumption of finished steel grew by 6.6% between April and June 2019, in comparison to the same period during the last year, when it had grown by 8.8%.
- This was the slowest in two years.
New investment projects
- The value of new projects announced during April to June 2019 fell by 79.5% year on year. This is the highest fall since September 2004.
- In absolute terms, the value of new investment projects announced during April to June 2019 stood at ₹71,337 crore, the lowest since September 2004.
- This is a great indicator of the fact that businesses really do not have faith in the economic future of India, irrespective of what they say in the public domain.
- The investment projects completed fell by 48% in comparison to the last year.
Expenditure and net exports
- Government expenditure tends to form around 10-11% of the Indian economy.
- In the last two fiscal years, the growth in government expenditure was at 19.1% and 13.2%, the highest since the financial crisis years of 2008-09 and 2009-10.
- Looking at 2019-20 fiscal to drive economic growth, the government needs to spend more and for that the tax growth is important.
- This figure for April to June 2019 stood at ‘-$46 billion’. This was almost similar to the net exports for April to June 2018 at -$46.6 billion.
- This is primarily because both exports and imports during the period were at almost similar levels as last year.
- Given this, there hasn’t been any increased economic activity on the exports front either.
- Investment, unlike consumption, satisfies no immediate want.
- The businessman putting his money today is basically taking a bet on the future, when it would start yielding returns. Such bets are a function of the “state of confidence” at the time of investment.
- A good indicator of “state of confidence” is new investment proposals.
- Their value fell from Rs 20 lakh crore in 2015-16, to Rs 16.2 lakh crore, Rs 11.4 lakh crore and Rs 10 lakh crore in the following three fiscals.
Measures for reviving growth
- Sectoral collapse has happened because of poor business decisions in banking, real estate, construction and lately in NBFCs/housing finance companies (HFCs).
- Now all these sectors are looking for stimulus packages to bail them out from their mistakes.
Consolidation of PSBs
- The current initiatives are either short-term measures or long-term reforms. The consolidation of Public Sector Banks (PSBs) falls into the latter category.
- It will not turnaround the banking sector, ease the credit flow or even improve the transmission of interest cuts — the three most important problems contributing to the slowdown.
- It is a structural reform much needed, long overdue and may reduce the recapitalization requirements.
- It will change the credit evaluation, disbursement and monitoring of loans, which is the core problem in PSBs.
Easing tax slabs
- To kick-start the consumption cycle money has to go into the common man’s pocket.
- This can happen by reducing income tax for the lowest slab, as recommended by the Direct Tax Code report.
- It can be done by making GST filing quarterly for MSMEs with less than Rs 10 crore turnovers to ensure they survive the slowdown.
- The GST Council can look at reducing rate slabs and reduce the overall burden on corporates.
- In a first sign of government addressing the economic woes, Finance Minister announced the removal of the surcharge on capital gains on shares for both foreign and domestic investors.
- It provided an upfront Rs 70,000-crore equity infusion into public sector banks to boost lending, and unveiled measures to push automobile sales.
- The surcharge of 3 per cent and 7 per cent on those earning between Rs 2 crore and Rs 5 crore, and over Rs 5 crore respectively had been announced as part of the Budget proposals.
These immediate steps can help revive the economic growth:
- Give auto sector incentives to invest and shift to electric vehicles
- Incentives to auto sector employees to upskill on electric vehicles
- Reduce the GST slab rates
- Adopt the Direct Tax Code, cut income tax for the bottom slab
- Improve credit flow to both consumer and industry
- Change the credit culture in public sector banks
- Stimulus should drive investment, upskilling for displaced employees
- Factor market reforms, including bringing the cost of land down.
- Battling the economic slowdown may require a slew of complex steps over the next few months, but the first and the most difficult step for the government is to acknowledge the slowdown.
- It should consult economic experts, some of whom have been urging the government to focus on boosting investments, which could help in reviving consumer demand and increase the output of key sectors.
- The government’s primary goal should be setting the basics right instead of going ahead with a “band-aid” patchwork.
- So, the only immediate solution for India seems to be to boost consumption through a stimulus given directly to people, in the classical Keynesian mould.
- Of course, such a stimulus should be combined with reforms to boost business morale and confidence.