Economic Perspective

I recently read statement of Chief Economic Advisor Mr. Krishnamurthy Subramanian in The Economic Times about Papa Bachao mindset needs to change. (Link embed) I also heard his full interaction which he had in a forum organized by one of the private sector banks. Authority and knowledge with which CEA spoke about various topics led me to search for his CV, just to see what you need to do to have that much knowledge and expertise. Without an effort, I hit upon his cv. One glance was enough to judge, I need to take next few rebirths to come anywhere close to it. (Link embed).  

I also went on to read article of former wise chairman of NITI Aayog Mr. Arvind Panagariya as suggested by CEA Mr. Krishnamurthy Subramanian. (Link embed) However, I didn’t gather the courage to look for former wise chairman’s cv lest would have led to more melancholy. 

Listening to CEA Mr. Krishnamurthy Subramanian and reading article of former wise chairman of NITI Aayog Mr. Arvind Panagariya, led me to the thinking whether its structural reallocation or symptoms of impeding recession. Is it a trouble of one company or sectoral issue? Or is it issue of one sector or related to several sectors? I am not an expert on the matter or an economist but when we Indians can comment on how Virat Kohli should do field setting without even ever holding a bat or ball in our hand, advise how government should run the show, when we are not able to handle our home or professional lives, so who prevents me from voicing my blabbing. No one…

Economy has grown at 5 percent during the first quarter of FY 20, which is lowest since last five/ six years. Should it ring alarm bells? I don’t think so. As rightly said by CEA during his interactions, you can’t continually expect economy to grow at 8 to 10 percent perpetually. Ups and downs are part of economy and its far better than other economies, which are growing at rate of 2 to 3 percent annually. Otherwise also, it is growing, not contracting. But it doesn’t answer, what would have been the growth rate, had government done right interventions at right time. What would have been right interventions, is also a matter of debate. We do need to remember golden statement, “where there are 6 economists, there are 7 opinions.”

Article by Mr. Arvind Panagariya cites example from automobile sector to drive home a point. I quote, “Unsurprisingly, now that the auto industry is experiencing a slump in sales, its captains can be seen making the “save us or else deluge” argument everywhere. For instance, appearing on a foreign television programme, the vice-president of sales at Suzuki Motorcycle India recently noted that commercial vehicles are the first indicator of the health of the economy and declared that their declining sales should be “a wake up call for … the government of the day”. On the same programme, the director general of Society of Indian Automobile Manufacturers (SIAM) opined, “Government has to come forward and help the industry” and that “We feel that a stimulus package is something that the government should really be looking at.””      Article goes on to state “Creative destruction is an integral part of a dynamic economy. If the government implicitly underwrites the losses of private enterprises by offering stimulus any time they suffer large losses, it runs the risk of making them indistinguishable from the numerous inefficient, perpetually loss-making public sector enterprises. Profits and losses are key signals that guide investment flows in a market economy. Losses force entrepreneurs to work harder to innovate and cut costs. If they fail despite this because demand has shifted for good, it is time for them to move their investments to other, more profitable sectors. Government rescues that shortchange this process harm rather than benefit the economy”  

Here, point is “Is automobile sector highly inefficient or is a part of creative destruction because of demand shift from it to the new competitors electric mobility or other mobility solutions.” None for that matter. If local automobile sector is inefficient, it wouldn’t have survived, let alone thrived since opening-up of the economy for last 30 years. Today we have presence of international names equally stressed out within our economy. There is more to it, than can be said. As far as demand shift is concerned, doesn’t seems to be right. For example, there is no visible change in the habits of the people from owning to leasing or pooling of the vehicles or using rental more than own vehicle. Leasing is yet to pick up and rental is not new now. Both rental and automobiles sales have grown together and will fundamentally grow together. It’s not only passenger vehicle market which is hit, it’s across all the commercial vehicle space. There are other factors which had led to drying up of the demand from the market such as credit squeeze, increase in rated load capacity, unnecessary hype and policy modifications by government for electric vehicles, impeding BSVI, putting it in higher rate of GST bracket etc.   

It’s true and I agree, government led rescue is particularly dubious and any protectionist policies need review. But there needs to be a level playing field. Otherwise, do we want electronics and toy industry repeat for automobiles and other sectors. Have we been able to build infrastructure and capabilities of international standards to compete with them (China for an example)? We have been propagating “Make in India” all over the world for past 5 years, what have we been visibly able to achieve out of it except for the hype. Manufacturing sector is still reeling under 0.6 percent in the first quarter of current fiscal year FY20 indicating onset of slowdown. We have clear signs of distress in power, telecom, airline, infrastructure and housing; Banking assets under stress and going through consolidation. What else are we waiting for? Great depression of 1929!!!

Article by Mr. Arvind Panagariya further states “the industry’s problems are of a long-term nature. Had it been genuinely competitive, it could have easily made up for the temporary fall in the domestic demand by diverting sales to the vast export market, which was worth $740 billion in 2017. But with just 0.9 percent share in this market, Indian auto industry has hardly proved its mettle in the world market.” This statement is without appreciation of the fact about differences in level playing field. Is Indian automobile accorded with same level of facilities that are available in Japan, Korea and US etc. to accuse them of being inefficient. Is ease of doing business same, as is in those countries? Are we able to use the same technology indigenously as is deployed in those countries at the same cost? Are we able to obtain capital and loans at same level and cost? Is tax incidence same? Is infrastructure of similar type available for automobile sector to excel? etc. If not, then the expectations are wrong, and industry is bound for the doom.

Article cites examples of certain sectors, products of which are operating profitably and grown healthily. As stated earlier, whole economy is not down and is growing at 5 percent which indicates compensating factors that might have saved depression till date with manufacturing at 0.6 percent in first quarter of the current fiscal. The products cited such as smart phones, smart speakers (both imported 99 percent estimate), washing machines (I recently bought Samsung one, disappointed to note it was imported from Thailand), refrigerators and air conditioners etc. For these small products, where credit squeeze or credit availability have less impact and buying capacity still haven’t dried out of the economy to pose grim situation of depression. Just imagine, if every sector would have grown, then the GDP growth rate would have been fantastic.

We do understand any stimulus package would require diversion of funds from one sector to the other. When freebies are given, or money is pumped in ailing public sector companies and banks at the cost of honest taxpayer that doesn’t mean diversions of the funds. With sales down, manufacturing growth rate at 0.6 percent, how reliable is the estimate of taking manufacturing sector contribution from 16 percent to 25 percent of GDP by 2022? How much beating tax collections are going to take if manufacturing sectors takes further slide down? Already Gross Tax Collection growth rate April to June period fell to 1.36 percent in 2019-20 which is lowest in the decade. The growth rate in the corresponding period last year was 22.4 percent.  https://www.bloombergquint.com/economy-finance/indias-tax-collection-growth-in-april-june-at-lowest-in-a-decade. Now is this also attributed to inefficiency of automobile sector or something structurally wrong which needs to be corrected.

Here, I would like to add “it is the consistency of the information that matters for a good story, not its completeness. Indeed, you will often find that knowing little makes it easier to fit everything you know into a coherent pattern.” Kahneman, Daniel (2011) Thinking fast and slow – Farrar, Straus and Giroux.

I am not an economist, nor do I know what needs to be done to put automobile and manufacturing sector back on track. But I do realize something is not right and needs to be corrected. What bad is too bad, only policy formulator in the government needs to decide, we can only put some facts and point of view for consideration of all.  

(The views expressed constitute the ideas & opinions of the author and the author alone; they can’t in any case represent the views and opinions of the author’s employers, supervisors, nor do they represent the view of organizations, businesses or institutions the author is, or has been a part thereof.)