How to Get back to the normal economy from the slowdown, How to Bail out from Sagging Economy

An economic recession signifies a drop in Gross Domestic Product (GDP), whereas a slowdown indicates a decline in the rate of growth of GDP.

 The slowdown in the Indian economy is once again hitting the headlines. There are several indicators of a slowdown in the economy across different segments Before we delve deep into the real economic scenario prevailing in the country, It is important to understand certain factors that influence the Economy.

Economic Recession & Slowdown

 An economic recession signifies a drop in Gross Domestic Product (GDP), whereas A slowdown indicates a decline in the rate of growth of Gross Domestic Product (GDP), The GDP is the total value of all the goods and services produced or created in a Country in a Year,

Generally, slowdown precedes recession but the reverse may not be always True,

An economic recession indicates a decline in spending by customers this decreases production, As Company tries to match the output with the demand. The decline in output leads to lays off and a rise in unemployment.  

In a slowdown, Though GDP remains in increasing trend but the rate of growth of GDP remains less than the previous year. Countries like India and China are facing a slowdown presently which is evident from the GDP trend

 It is evident from the above figures that the rate of growth of GDP in India is showing a declining trend, the Slower growth rate was evident in household Spending and gross fixed capital formation. A mid the slowdown, Moody’s investor’s service has cut India’s GDP growth rate to 6.2% for the calendar year 2019 against its earlier projection of 6.5 percent Industrial production is lowest in India in the past three years, subdued corporate results reduced private investments, etc are indicators of the sluggish economic scenario.

Consumption an Important Tool for Economic Growth

Consumption reflects growth and prosperity of the economy, Decline in consumption may arise due to any of the reasons like an increase in unemployment, high inflation, high rate of interest, high tax rates, slow growth in disposable income, etc.

Reduction in consumption expenditure directly impacts the economy as it reduces the demand for that product that in turn reduces production and the entire business cycle.

Economic recession

AN economic recession indicates a decline in spending by customers this decreases production, as the company tries to match the output with the demand. The decline in output leads to lays off and a rise in unemployment.

The matter of a slowdown in consumption has become a matter of discussion since the persistent decline in demand in the automobile and FMCG sector is being reported.

The projected growth of 13-14% in the FMCG sector is revised and reduced to 11%-12%, The growth in the FMCG sector is at least 2% lower in the quarter ended March 2019 compared to the December quarter of FY 2018.

The downfall in sales is attributed mainly to the decline in income in rural economies owing to factors like poor income from the sale of crops, the uncertainty of monsoon, etc. The Auto industry, on the other hand, is marred by an increase in the cost of insurance, an increase in fuel prices and liquidity crisis, etc.

private consumption, which is the important aspect of aggregate demand, has been under pressure in both rural & urban areas.

The immediate challenge in the Indian economy is to boost demand as the slowdown in creating cascading effects into different sectors.

SME & SLOWDOWN

SMEs sector involved in the manufacturing of automobile components is witnessing a downward trend in business owing to a decline in demand of the automobile sector- especially passenger vehicle and two-wheeler segments, SMEs are major contributors in the automobile industry across the entire value chain.

In the FMCG sector, It is expected that some renowned companies, the giants may lay off workers due to slump in the market, Many large industries have the third party manufactures or job work units working as ancillary units who are mostly micro and small units may become the worst sufferers of turmoil in the economy.

Apart from reduction in the operational activity, MSME is facing several other challenges in the present scenario, Delay in realization of the dues from debtors, poor access to credit due to liquidity crisis in the NBFC sector and lack of confidence in the market, high rate of interest, digital disruptions are some of the factors persistently posing serious threat and challenges to the most vulnerable MSME sector.

From the figure, We understand that the SME sector has a major share in the auto component industry, the slump in the automobile sector has hit small-scale industries and workers in the auto sector hard,

There are people working in the paint, rubber, plating, electronic and electrical parts manufacturing industries , Companies are announcing block closures one after another saying that there is slowdown in the industry , The immediate revival of the industry from the deep slowdown seems difficult though a host of measures have been announced by the Finance Minister, The revival may be difficult in the immediate future The downturn is evident in several other industries like transport, real estate, hotels, and financial sector, etc .

 What does the number say?

The new investment proposal touches a 10-year low.

Industrial output measured on the Index of Industrial Production (IIP) slowed to 2% in June 2019 against 6.9% June 2018.

The manufacturing sector witnessed shrinkage in their growth to 1.2% as against 6.9% June 2018.

 Export has declined by almost 10% in a span of one year.

Private investment is shrinking

The downfall in sales is attributed mainly to decline in income in rural economy owing to factors like poor income from the sale of crops, the uncertainty of monsoon, etc, The Auto Industry, on the other hand, is marred by an increase in cost of insurance, increase in fuel prices and liquidity crisis etc.

Stimulus Announced for Revival of Economy.

•  In Order to improve the cash flow of MSMEs, It has been announced that GST refunds till August will be paid within 30 days and the future will be paid within a span of 60 days.
•  Rollback of enhanced surcharge on short term and long term capital gains earned by foreign portfolio investors (FPIs) and domestic investors, these measures could reverse the capital outflows.
•  To boost the automobile sector, the Government has lifted the ban on the purchase of vehicles by Government departments.
• Allowed additional depreciation of 15% on Vehicle acquired from now till March 2020.
• Relaxed FDI norms in several sectors to boost investments like single retail brand, coal mining, digital media, and contract manufacturing.
•  Relaxation in GST rates for the automobile sector is also expected.

Is the Slowdown Cyclical?

The movement in the economy may follow a particular pattern or it may ignore the general pattern and dive deep into a particular scenario, The second situation is more alarming than the first one. It is important to ascertain whether the present scenario in the Indian Economy is Cyclic or something beyond it.

The decline in Gross domestic savings, investments, and wage growth indicates that the slowdown is more than a mere cyclic trend. Some expert suggest that slowdown can be a combination of both structural $ Cyclic factors and it is taking longer than expected time to turn around, Another causing concern is a decline in capital expenditure 

Solution

Interest rate cut – The Reserve Bank of India has already reduced interest rates by 110 basis points this year to boost credit but there is the weak transmission of the rate cuts to the society at large, But the rate cut is not passed on completely by the banks to the public. As banks are suffering from challenges of mounting NPAs, the decline in the share of low-cost deposits, weak capital and stiff competitions it becomes difficult on its part to pass the benefit of a rate cut to the public. One may ask how to rate cut benefit economy, A rate cut will help in the revival of the economy in two ways – on one hand, it will discourage the savings hands of individuals and investors. Banks must mandatory transfers the benefits of a rate cut to the public, Investment allowance to be introduced especially for major employable sectors is inevitable.

Sectors like tea plantation which is labor-intensive are suffering from a serious crisis like adverse weather conditions, poor market prices, and high capital expenditure, etc.

In order to keep the “flow” in the economy, It is important to make Insolvency & Bankruptcy Code (IBC) simpler and time-bound, It is equally important to ensure the benefit of several welfare schemes Like PM Kisan, DBT must percolate down to the real beneficiaries.

Recently, It was announced that Reserve Bank of India shall transfer 1.76 Lac to the Government of India, If such surplus is used judicially it can provide the much-needed stimulus to the economy.

Specialized Stimulus Package for MSMEs

MSMEs are the most vulnerable & sensitive sector. Any doldrums in the economy impacts the sector with high intensity, It is, therefore, necessary that apart from the general reform measures for the revival of the economy, it is equally important to provide customized stimulus package for MSMEs, Some Suggestive measures for strengthening MSMEs are :

Development of MSME Cluster:

Traditionally MSMEs lack bargaining power; they get suppressed and at times even exploited, In other strengthen MSMEs It is essential to develop the clusters, In India, though there are several identified clusters they are do not receive necessary supports from investors, they lack skills and mostly depend on outdated technology,

It is necessary to invite private players for investment in clusters, Development of clusters will improve the operating efficiencies of the sector and they will attain economies of scale, Large corporate must adopt clusters according to their nature of businesses, it will provide a win-win situation to all the stakeholders.

•  Customized Loans: Generally, Banks lend to MSMEs based on financial, historic records and other related documents, The assessment of limit is made based on traditional lending process and loan gets disbursed, It is often observed that the loan amount and repayment schedule do not match the cash flow of the MSME borrower and as a result either the borrower has to repay the loan with difficulty or the loan gets defaulted, With the advent of technology, the business pattern is undergoing change rapidly; the traditional method of limit assessment may not be suitable for all types of business, It is essential to understand the cash flow cycle of the client and provide loans based on the same, Customisation and scientific assessment of credits limit is important to support the sector financially. 
• The realization of dues: It is often observed that realization of dues from debtors takes a long time, as a result, the entire Operating cycle of the MSMEs but due to high dependency of few clients, poor bargaining powers and lack of awareness the MSMEs tend to remain dependent on traditional methods.
•  As discusses earlier, MSMEs are most vulnerable sector, It is essential to develop a realistic revival package to ensure perpetual succession of MSME units, Often we find that after a certain span of time, certain MSME units cease to operate either because their product get obsolete, they become debt-burdened or they become debt or they lose their market share because they were dependent on single client, it is essential to create awareness among the MSME entrepreneurs about changing business scenario , it’s probable impact across industry, measures to mitigate the impact of changes, It is necessary to impact the importance of being agile in the VUCA world, These can be impacted by the DICs, associations of entrepreneurs, panchayats and others similar bodies, At the same time skill development is equally important to bring diversification in the business .

MSMEs are the most vulnerable & sensitive sector, Any doldrums in the economy impacts the sector with high intensity, It is therefore necessary that apart from the general reform measures for the revival of the economy, it is equally important to provide customized stimulus package for MSMEs.

Other Measures: Aiding technological development supporting innovation through incubation centers, ensuring market linkages and introduction of tax incentives to boost investment in the MSME sector.

A persistent sluggishness in an economy may lead to deep recession causing detrimental effects across all the sectors leading to sizeable job loss, deceleration in earning, output, investment, and consumption, etc, It is the role of government and Regulators to revive the confidence among different value chain of consumption, production, and investment .