INDIA’S CURRENT ECONOMIC SLOWDOWN: IT’S ANATOMY, PRESENT AND FUTURE CHALLENGES*

ABSTRACT

Indian Economy is passing through a severe slowdown characterised by estimated GDP growth touching 5% during 2019-20 - an eleven year low. As per various estimates, even during 2020-21, the growth may touch a moderate level of 5.8% to 6%. The irony is that all the important components of GDP namely Consumption, Investment, Export-Imports have slowed down and Government expenditure is understood to have shown a meagre growth of 1.5% over 2019. So the most relevant question is when the economy would recover?

In the current write-up, an attempt has been made to cover entire gamut of slowdown like Basic Features, Stock Market Dichotomy, Early Inadequate actions, Southward march of Macro-economic parameters, Major reasons for slowdown, Implications, Government Action points, Lukewarm response to corrective measures, What remains to be done, Prospects of recovery of Economy in near future and Challenges. In covering various aspects of slowdown as mentioned above, efforts have been to stuff them with ongoing in all the important sub aspects. As currently the economy is facing many headwinds and embroiled in social turmoil so there could be substantial variations in conclusion and even in narratives. Disruptions and hostility at the global level have potential to influence the conclusion in an unexpected way.

INTRODUCTION

For Indian economy, based on recent economic environment, it is said that rarely a major economy traversing well on the path of good growth, could experience a meteoric fall in its fortune within a short span of time and that too when the country is ruled by a Government with overwhelming majority with no fetters to take quick corrective steps to reverse such fall. Though difficult to agree with the narrative that the origin of such slowdown could be traced to two major economic events namely Demonetisation and GST as there is no empirical study to prove the point but based on economic logic it could be argued that logically they played key role in contributing to the slowdown. However the slowdown appears to have started after those events. With the presentation of Interim Union Budget 2019-20 containing measures of surcharge on super non-corporate income when FIIs ferociously withdrew, scepticism on the continuation of growth of the economy was raised. Since then the unfavourable movements in the macroeconomic parameters from one quarter to other confirmed that economy has been downsliding and it sent jitters to Government agencies and policymakers. Some delays however on the part of Government occurred as they did not believe that this is indeed going to be a severe slowdown.

Despite some delays, corrective steps were taken up by the Government on fiscal front and by the Reserve Bank of India on the monetary front keeping in view the complementarity of the fiscal and monetary policies for stimulating demand and investment. Among the total of 30 steps, the important ones were bringing down the capital cost through downward revision in repo rate and to revive investment cycle; Cutting down corporate tax on the presumption that they will start investing and thus reviving the investment cycle; Increase in outlays on developmental and poverty alleviation schemes to improve rural demand etc. Likewise surcharge on super income were also reversed so that FIIs could return to improve sentiments in stock market. However, these steps and also others did not show desired impact on the economy in arresting slow down. This could be corroborated from the fact that GDP continues to show slide so far. The reasons for ineffectiveness of these policies have been examined in details.

In view of inadequate impact, it dawned on the policy makers that the slowdown could be deep rooted and calls for taking more steps. In consultations with economists, industry captains, industrial sectors' representatives. Government, it appears, will go for more sops in the ensuing Union Budget to be presented on Feb1. Meanwhile the economy has started facing another headwind that is inflation which has not only crossed the limit set by the Reserve Bank of India but if not controlled could even get converted into stagflation. Food inflation has already touched 14% during few months period. So the Union Budget is being enthusiastically awaited to witness measures which would help in arresting inflation and giving a strong pace to recovery of economy. 

So it would be an interesting exercise to examine in this write-up the current slowdown against the framework described above. It may also be emphasised that normally the materials available on the topic is in tits bit covering generally a few aspects but in this write up all dimensions of slowdown is covered comprehensively.

 MATERIALS AND METHODS

Preparation of the write-up is basically based on the secondary data which could be justified considering that the nature of topic falls under Macro economics category. No primary surveys were conducted since most of views of specialists were available in the form of published material. The materials available has been re-examine in details to draw home various aspects of slow down. For the purpose of preparing this write-up the main source of collecting information was Google search and thereafter delving deeper the sources, wherever was found necessary. The write up becomes quite important in the sense that efforts have been made to present an integrated comprehensive view on the current slowdown of Indian Economy.

ANALYSIS AND DISCUSSIONS

The various aspects of slowdown of Indian Economy are discussed as under:

BASIC FEATURES OF SLOWDOWN:

In the third quarter of 2019-20, GDP rose by only 4.5% which is about half when compared with the first half of 2018. Only in 2018 Indian Economy was touted as world’s fastest growing major economy and with the announcement of various developmental schemes/programmes and reforms it was expected to touch newer heights of growth. It was also expected that the country would capture an increasing share of global community alongside China and US. However, growth expectations went for a toss. However all these expectations were belied as growth rate plummeted. Even smaller economies like Philippines and Indonesia grew faster than India in the last quarter while Malaysia was just a little ahead. While Malaysia logged 6% and Vietnam 7.3% growth, our neighbour Bangladesh is slated to grow ahead us by growing at the rate of 7.4% in 2019-20. Slowdown still continues with no end appearing in sight in near future. As against the prevailing uncertainties, several of the top domestic and international economists acknowledge that major economic parameters have begun to show deeper slowdown and upturn in the economy may not be there in the near future.

There is also no consensus whether the nature of current slowdown is ‘cyclical’ or ‘structural’. Reason being, that if it is cyclical in nature, it would get corrected automatically but if its nature is structural then more corrective measures in the form of deeper economic reforms would be needed. However, the slowdown encompasses both the elements. Since world economy is also facing tepid growth it must have played crucial role in country’s slowdown and situation in due course would improve. Some studies by organisations like Goldman Sachs however expressed that while domestic factors account for 60% for the slowdown, 40% could only be attributed to external factors.

Then, for obvious reasons, protagonists and Government officials are out to say that economic growth has seen just a temporary slip and that the macroeconomic parameters of the Economy remain intact and would provide desired resilience to the economy. Earlier, FM had also observed that there was no recession which did not appear convincing as slowdown has assumed serious proportions since then, if one goes by latest decline in GDP which is worst in 11 years. What also looks bizarre the utterances of some of the politicians who talked while shredding to pieces all economic principles to draw home their view point that there was no slowdown viz. "Every three years there is a demand recession in economy. It is a cycle. Then the economy picks up also so no slowdown”. Further, "Airports are full, air traffic has been increasing, trains are running full, people are getting married” and so on politicians quipped.

It has also been pointed that there is an element of surprise and dichotomy which challenges the current downturn. How come e-commerce companies like Flip cart and Amazon had recorded sales of Rs. 30,000 crores in the last festive season if there is a slowdown? Likewise how considerable sales of ultra sophisticated luxurious cars - costing crores of rupees occurred in a recession-stricken country like India? However without going into fallacies of arguments let us only mention that it could be occasional blips since once discount season was concluded, foot falls and orders only tricked. Further, Automobiles Industry continues to remain in the throes of crisis to reach only to a two year low. Though some improvement has taken place but overall position of the industry remains bad. Further over all the sales of luxurious brand cars have also reportedly declined in 2019.

Stock Market Dichotomy

Another notable aspect of the current slowdown is that the stock market has not only revived itself but also is making new life time highs as is evident from Sensex and Nifty exceeding 41,000 and 12,200 marks with convincing margins while the country is experiencing severe slowdown?. Further, FIIs which had suddenly withdrawn when FM had raised surcharge on Income of Rs. 2 - 5 crores from 15% to 25% and for amount below to 15% - 37% in the last interim budget have come back with a bang. FIIs during the 2019 surged 17% to Rs.1.8 lakh crores from 1.5 lakh crores on YOY basis.

Some important factors which had improved the sentiment of FPIs could be attributed to anticipation of tax reforms, increased chances of China - US negotiated settlement, status-quo in interest rates in US and quantitative easing in Europe. Another domestic factor which affected the stock market is earnings of the companies which have shown some improvement in their profits partially due to cut in the corporate tax as one of the factors.

It can definitely be argued that resilience in FIIs inflows have not been strictly influenced by the slowdown but too related to the economic conditions prevailing abroad. But the future positive expectations about the resilience in economy constituting exogenous factor has not been ruled out.

Early inadequate action?

Inadequate focus on the economic developments and overconfidence that the country is progressing well seems to have delayed the early action on the slowdown through concerted efforts. Govt. and even the people associated in the so called watchdog groups too appear to have failed to detect early signals and it was then few quarters ago when it dawned that the economy was in the throes of slowdown Government took action. However, thanks to FM, other bureaucrats and policy makers that they realised the severity of slowdown afterwards and made sincere efforts to intervene in a best manner to revive the economy through various policy measures. It is however widely believed that measures taken were insufficient and some more were required to be taken to ensure that economy start recovering even with time lag. Meanwhile, in the light of Govt. resolve that it will take whatever policy measures which could be thought of, everyone now is pinning hopes on ensuing Union Budget in the Feb. 2020.

 SOUTHWARD MARCH OF MACROECONOMIC PARAMETERS

 Among continuous debate on slowdown, very recently, some of the institutions like IMF, World Bank, regulators like RBI and rating agencies, all are mostly painting grim picture of economic slowdown opining that recovery will take time. Reason being that some of the macro parameters are still showing either very slow growth or de-growth:

 CSO data revealed that the economic growth which peaked at 8.2% in 2016-17, declined to 7.2% in 2017-18, to 6.8% in 2017-18 and further to 4.8% in the first half of 2019-20. As per latest estimates the Economic growth during the whole 2019-20 is estimated at 5%. So far as movement in growth on quarterly basis is concerned, it peaked at 8.11% in Q4 2017-18 followed by 6 successive quarterly declines. So it is a monotonic decline.

The latest growth rate of 4.5% in July –Sept (2019-20) quarter indicates a steep fall during the 26 quarters when compared with the figure of 9.4% in the Q1 (2016-17). It is even lower than the 4.9% growth obtained in Q1 (2012-13). If the trend is not reversed, Economy could even reach so called Hindu Rate of Growth during earlier government.

Even the first advanced estimate of GDP growth for FY 20 has been pegged out at 5% (GVA is being put as 4.9% of GDP)

The Index of Industrial Production (2011-12) which had shown a rise of 8.4% in October 2018 and 4.6% in Sept 2018 recorded - 4.3% growth in Sept. 2019. For the last two months Aug. and Sept 2019 there was a de-growth of 1.4 % and 4.3% respectively. 

Merchandise exports growth too had shown a de-growth of -6% and        -5.6% during August and Sept 2019 respectively.

Consumer Price Index growth which was 2.3% in Nov. 2018 increased to 4.6% which is above the threshold of 4% fixed by the RBI as inflation target. Food inflation is high at 10% and will push overall inflation level.

Another most disquieting trend was observed in Confidence Index in Economy monitored by the Reserve Bank of India. RBI’s recent survey indicates that consumer confidence dropped to a six year low in Sept. 2019.

Due to slowdown, Banks’ Credit growth during 2019-20 is expected to be 6.5% to 7% as per ICRA report which incidentally is 58 years low. Credit growth to Industry and services sectors is expected show growth rates of -3.43% and -2.62 % respectively. 

As per latest available figures PMI services rose to a 5 month high of 53.3 in Dec. 2019 from 52.7 a month earlier. Likewise Manufacturing PMI rose to 52.7% from 51.2 during the same period. But then it is difficult to say that it shows definite improvement and would form secular trend.

The slowdown could be summarised in the table below:

Sector 2018-19 2019-20 Observations

Agriculture 2.9 2.8 Slowest in 4 years

Manufacturing 6.9 2.0 Slowest in 15 years

Construction 8.7 3.2 Lowest since 2014

Services 7.5 6.9 Slowest in 2 years

Pvt. Consumption. 8.1 5.8 Lowest since FY13

Gross Fixed Capital 10.0 1.0 Slowest since FY 03

Per Capita Income 10.0 6.8 Lowest since FY 06

GDP 5.0% Lowest in 11 years.

With so many important macro parameters showing unfavourable movements, it is difficult to gauge how much time will elapse for the economy to show reversal of the current slowdown.

MAJOR REASONS FOR SLOWDOWN

As GDP comprises of 4 major components namely Consumption, Investment, Government Expenditure and Trade balance (Export- Imports), the growth in GDP is affected by the changes in these components. For understanding the reasons for current slowdown, analysing changes in these variables would be necessary. During the current slowdown, Consumption, Investment and Foreign trade components all have been negatively affected. The growth in the Government expenditure is also not encouraging. It is reported that it increased by 1.5% during 2019. In view of these movements the GDP growth is bound to fall which has been mentioned earlier. Now how these parameters were adversely affected has been analysed below:

Tepid growth in Consumption – one of the components of GDP, seems to have adversely affected a few sectors quite prominently namely Automobiles, FMCG and Realty. It was automobile industry wherein the early sign of slowdown appeared prominently. It may however be noted that the downturn in Automobile Industry has also been caused due to uncertainty created through simultaneous announcement of a number of policy changes by the Government. For example, in a time bound programme, it was hurriedly decided to implement migration to BS VI and switch over to EVs without enforcing other desired steps like implementing incentives and scrapping policy for old vehicles, incentives to switchover to electric vehicles, creating infrastructure for charging etc. Further, ownership cost of vehicles had also gone up considerably due to increase in cost of purchase, hefty rise in Insurance charges and increase in parking. The difference in the cost of Electric Vehicle and petrol or diesel driven vehicles is expected to be exorbitant. Many people have also abandoned the plan of owning new vehicle believing that it will be better to use services of auto aggregators like OLA, UBER and others

Growth in Agricultural sector which is expected to decline (from 2.9% to 2.8% in FY 20) also affected aggregate demand adversely in rural areas. It is also reported that the rural wages remained depressed which was also instrumental in slowing the demand level. Likewise, urban demand too had adversely been affected due to confidence crisis in the economy and owing to tendency on the part of consumers to spend less which ultimately resulted into sluggish demand in urban areas. Thus there was sluggishness in demand level both in Urban and Rural areas leading to slowdown. Surveys also revealed that slowdown was more pronounced in rural than urban areas. In such circumstances, the discretionary spending got adversely affected in urban and rural areas affecting the aggregate demand in sectors like FMCG and Auto sectors. FMCG earlier was considered to be a dynamic industry, value premia on FMCG stock recently touched 11 year low.

Despite Indian Economy having been globalised, it has been suffering from sluggish growth in exports. Steps like not joining the RECP, abrogating several FTAs and loosing competitiveness seriously affected volume of exports. Indian merchandise exports have reportedly shrunk 1.8% in Dec. 2019 continuing the downward trend in straight 5 months. It is again a cause for concern that the share of trade in goods and services in GDP fell from 56% at peak in 2011 to 43% in 2017. While it may not be true to say that demand for exports suffered solely due to global slowdown but they did suffer to some extent due to tepid global growth. But now the global growth is projected to rise to 2.5%- underpinned by gradual recovery in investment and trade from last year, so our exports could also get a leg up but to what extent difficult to say.

NBFCs issues seem to have played a key role not only turning the sentiments bad against the economy but led to overall slowdown due to their lending capability getting impaired. Sudden change in fortune of ILFS due to crippling impact on its lending capabilities in the Sept. 2018 was one of the major trigger points for the slow down. Since there were more than 300 companies associated with the ILFS, it resulted in credit squeeze to numerous sectors/companies. Considering that NBFCs form the last mile efforts in financing where banks generally do not go, credit flow too many projects were adversely affected. As the volume of defaults were not totally known, banks also turned shy in extending credit to NBFCs and in turn choked their capabilities to lend further. DHFL was yet another great failure which affected liquidity in the economy but its adverse impact was not so widespread. Even though Government has taken steps to ensure that NBFCs are extended adequate resources by banks based on guarantees by the Govt., the process is yet to show desired result.

The impact of important reforms like demonetisation and GST- which were implemented hurriedly without proper preparation, had adversely affected the aggregate demand. Govt. it appears never fathomed the adverse impact of these 2 basic reforms and vehemently denied critics too that there was anything wrong with these great steps. In demonization, as it is known, that while in the process of exchange of the old currency with the new currency, the currency deposited in banks got partially stuck as it was to be released only after proper enquiry- led to adverse impact on production of informal sectors and employment due to resources crunch. Sudden removal of almost 56% currency in terms of value and getting them replaced quickly did not prove a soft cake walk. ATMs could not help to the desired extent in dispensing new currency notes since they were not configured to for new notes. Further changing size of notes was also affected the process of dispensation. Instead of introducing new notes for Rs 1000/- the Govt went for introducing Rs.2000/- denomination note and they were also not available in desired volumes. Besides, such introduction also created problems in getting exchange for small purchases in market putting public to great inconvenience. With the introduction of new Rs. 500/- denomination there was however some relief. Another issue was that was that people were to stand in queue in long hours and also not getting new currency instantly. So the entire cash flow of small and medium industries was badly affected. According to erstwhile FM statement demonetisation must have shaved the GDP to the extent of 1.5% at least.

GST appears to have been again implemented without deep understand the mechanism as to how the system will affect the revenue generation. It was presumed through Govt calculations that GST will take care of the total revenue generation aggregate all the indirect taxes and Govt. will be able to compensate the state for losses in their revenue following implementation of GST for 5 years is going haywire. What really had happened that those who were not paying tax had to pay all of sudden so there was lot of cribbing and also leading to find ways for evasion. Tax slab became higher for some businesses which were paying lower tax and tax on luxury goods were found to have become lower under GST. Further IT solution for the GST also did not work properly. Being totally I.T. driven, firms were required to engage services of CAs at a considerable cost. The resultant impact of introduction of GST has upset the production processes. Small business had to suffer most in the process. A fall in the estimated revenue has also upset the fiscal math and now Government is thinking to rejig the GST rates in such a way so that tax productivity could be raised without lot of opposition. It is again surprising to note that after 5 years compensations due to states from GST is expected to leave a gap in the range of Rs.1.07 lakh crores to Rs.1.23 lakh crores after June 2022. As per latest information to reinforce tax revenues Govt has raised the target of GST Collection to 1.25 lakh crore for February.

IMPLICATIONS:

The slowdown has severe implications for the economy in various ways. The first and foremost casualty of slowdown will be the medium and long term growth targets set by the Government. For example taking the target of taking economy to $5 Trillion level by 2024-25 may not be achieved based on the current state of GDP growth. Reason being that until and unless Economy grows by minimum estimated level of 10%, (which appears almost impossible at the present juncture) the target of taking it to $ 5 trillion may remain a pipe dream. According to yet another estimate, as per current reckoning we can reach to $5 trillion economy only by 2030 based on present reckoning of growth rate.

Likewise meeting other missions’ objectives and other targets set out by the Govt like Make in India or doubling farmers’ income by 2022 or ‘housing for all’ envisaging construction of crores of houses may not fructify. We should also not forget that the slowdown could further deepen and can further aggravate the situation. Therefore, corrective steps have become a Hobson’s choice for the Government to break the vicious circle.

Continuation of tepid growth would only leave us trailing on the path of growth as even smaller countries have started going ahead us as mentioned earlier. This would mean great demoralisation even for leadership cadre since we guide the world in various fields through setting good examples of growth. We could also be pushed down in various IMF and other developmental indices instead of getting our position elevated.

Continued slowdown can have serious implications for stock market which is currently showing unprecedented vibrance. Slowdown can bring down the performance of the industrial sector and win turn value of firms. In such a situation FIIs may not feel comfortable to invest in the country. The current social turmoil resulting into people on the road for quite some time has already been sending wrong signals to investors. This coupled with slowdown can have disastrous implications for the stock exchange and potential for ruining investment climate.

It may however be mentioned that this does not mean that Government has not taken steps to rejuvenate the economy however the resultant impact of the measures is yet to appear.

GOVERNMENT ACTION POINTS

While deciding to fight the slowdown, the basic objectives appear to be as follows: A. Ample amount of credit at cheaper rate should be available to the corporate, MSME and other sectors. B. Public should have more money in their wallet to spend on purchase of goods and services C. Raising corporate profitability to push up private sector investment and D. Inflows of FDIs/FIIs in the economy should continue unabated. Many other steps, which could said to be enablers of the foregoing objectives, were also taken and even some may also come in the ensuing Union Budget. It would be an interesting exercise to review some of the major policies announced by the Government/RBI:

Considering the pump priming could be necessary in the rural area where the slowdown has occurred due to various factors like stagnating wages, shrinking employment opportunities, remunerative Minimum Support prices were made, Pradhan Mantri Kisan Samman Nidhi was introduced in 2019 and outlays on rural employment, rural poverty alleviation like MNREGA, rural housing and other schemes were raised. Pradhan Mantri Kisan Samman Nidhi scheme provides for Rs.6000/- annually payable in 2 equal instalment of Rs.2000- every 4 months. It was meant for providing assistance to 140 million farmers. As of Dec. 2019 Rs.36, 000 crores have been disbursed to beneficiaries. Provision has been made to ensure that dues from various Government programmes are directly credited in the beneficiaries’ account to minimise pilferages. 

For improving the capability of banks to lend more, mergers of ten banks were affected in the month of August 2019 which reduced the number of public sector banks from 27 to 12. The basic objective of merging banks was to create larger banks to save Govt from contributing to their capital from budgetary allocations, enhancing their lending capabilities, increasing trade financing and enabling them to go for financing larger corporate with lesser risk. It was also expected that through this step revival of investment in the economy would become easier.

A sum of Rs. 70,000/- crores was announced to recapitalise banks upfront. Through this measure the lending capability was expected to be enhanced by Rs. 5 trillion.

In order to encourage corporate sector to revive investment cycle in the economy and also enabling them to improve their competitive edge, corporate tax was reduced from 30% to 22%. This happened first time in 28 years. With this step, the corporate tax which was higher than their counterparts in South East Asian countries was levelled off. This was one of the oft repeated demands from corporate world in the past as a precursor to improve export competitiveness. Further, in order to encourage manufacturing under Make in India programme, provision was made for manufacturing firms to pay tax at a lower level of 15%. Angel tax was also removed to push up investment in the economy and promote innovations and competitiveness.

Surcharge levies in Finance Act 2019 on non corporate from 15% - 25% on their income ranging from Rs.2 Crores - Rs.5 Crores and on income above Rs. 5 crores from 15% - 37% were withdrawn. FPIs and Domestic portfolio investors (for individuals and Hindu undivided families) were exempted from paying enhanced surcharge on capital gain tax arising from sale of equity shares and units of Mutual Funds. This was done to encourage FPIs to come back to the stock market.

Very recently in order to revive investment cycle Govt has also announced that it will make a large investment of Rs.102 trillion on infrastructure. On the rural economy spending is planned for Rs. 25 trillion and Rs.3.5 trillion will be made on delivering clean and safe drinking water to every household. 

While FDI was relaxed for various sectors but in an important step one hundred percent provision of FDI was announced in the singe brand retail.

Rs.25, 000 crores fund (Govt will contribute Rs.10, 000 crores and SBI and LIC Rs.15, 000 Cr.) was set up for real estate. It is expected to help to complete 1600 stalled housing projects. It is likely to help 4, 59,000 units housing across the country. Considering that hundreds of industries are connected with the realty sector, financial help of this magnitude to this sector will have multiplier effect thereby raising employment level and growth.

As a meeting disinvestment target, Government has also decided to go for strategic selling of its share in profitable companies like BPCL (53.2%); State Trading Corporation (63.7%) and Container Corporation of India (30.8%). Many more companies have been identified for such disinvestment. Govt is also looking for selling Air India on 100% basis. Proceeds obtained from disinvestment are expected to be spent in economy on various developmental schemes and infrastructural development to stoke demand in the economy and thus overcoming slowdown.

Measures were taken by the Reserve Bank of India to extend financial support to NBFCs whose lending capabilities were impaired. Budget 2019-20 offered a onetime partial guarantee of Rs. 1 lakh crores to PSBs for purchasing consolidated high rated pooled assets of financially sound NBFCs. This has to cover their first losses up to 10% and was aimed at easing liquidity stress of NBFCs/HFCs. Earlier, after ILFS default that brought forth lending crisis among NBFCs, assets of NBFCs rose 12.8% to close to Rs.32 lakhs crores. They are now able to raise funds from market at rates lower than before ILFS bust. In the ensuing budget some more steps could be announced. By creating SPV out of SUUTI (specified underlying assets of UTI) assets would inject up to 20 percent of the book value of any identified NBFC via preferable equity. 

Improvements have been made in IBC to make it more effective in recovering NPAs and to improve banks lending capacity and their viability.

In the ensuing Union Budget many other measures to improve economy could be announced.

Prime Minister has exhorted industrialists that Government has been doing its best and time has come for them to respond to the need for faster revival in investments in the economy.

In a nut shell it could be observed that Government has not left any stone turned in taking step to reflate economy through pump priming and reviving investment cycle to fight with the current slowdown. But then why despite such an efforts the desired improvement did not take place.

LUKEWARM RESPONSE TO CORRECTIVE MEASURES

The impact of various measures announced by the Government so far should have resulted into generating strong signs of recovery by the Indian Economy. Even though claims are being made that green shoots have started appearing in the economy but unless they get converted into a secular trend, it is difficult to believe that economy has started picking up. So it may be advisable to wait for more time to see whether there any optimism on that count emerges finally or not. Now if the growth rate is not picking up how employment position could improve in the economy which is at 6.1 percent is highest during the span of 45 years.

The reasons for inadequate response of the measures taken up by the Government are as follows:

First, lot of expectations were made from reduction in corporate tax rate and it was expected that revival of investment cycle by corporate will start taking place. Infact the Government has made a huge sacrifice of Rs. 1.45 lakhs crores of revenue at a time when tax revenue collections have been showing substantial shortfall. However, the largesse given to corporate did not help in reviving the investment cycle in the economy and that too when it was most needed considering that gross fixed capital formation has fallen below 30%.

In granting this concession it was expected that corporate sector will pass on benefits to either consumers in the form of lower prices of their products or will result into capex thereby improving production capacity and generating employment opportunities. However, contrary to expectation from Government neither had happened. Reason being that the surplus money is being used primarily by corporate for deleveraging their balance sheet. According to information available, top 50 companies had reduced their debts by whopping Rs.59, 600 crores in the Fiscal 2019.

Government has also become extra persuasive to frantically meet the objective of revival of investment cycle. FM has continuously been talking to the industrialist to understand constraints which they are experiencing in investing the money in their business. Further, she also wanted to understand the problems being faced by different production sectors which could be looked into on urgent footings. Prime Minister has very recently called a meeting of 11 top industrialists of the country and exhorted them to revive investment cycle in the country in areas wherever they like. He also listened how ease of doing business could be improved. While from Government side the exhortation could be appreciated but then the major problem with Industrialists is what to do with the underutilised production capacity due to slowdown which may not improve in the near future due to tepid demand. They will definitely not go for capex when the current capacity utilisation is estimated to be around 70%. So the revival of investment cycle could delay for some more time.

Monetary Policy proving ineffective?

 From Reserve bank of India perspective repo rates were reduced and emphasis was made to pass on the fall in interest to borrowers to cheapen capital and revive investment cycle. The objective was to bring down the cost of capital so that the corporate could go for availing cheap credit and help in reviving investment climate. There were 6 cuts totalling as much as 1.35% in repo during 2019. But the monetary measures did not prove effective to the desired extent due to several reasons some of which have already been highlighted. 1. As already mentioned due to low demand most of the industries were facing the problem in utilisation of total utilisation of available production capacities hence were not enthused to borrow. 2. As interest rates abroad were relatively cheap at least with a 0.50% than India, many corporate have raised lots of resources from abroad. 2. Industries were sceptic about the vibrancy in investment climate of the country due to factors like uncertainty in industrial policies and taxes.

Though in most of the meetings with the public sector banks, Reserve Bank of India goaded them to pass on the benefit of repo rate cut 100% but it worked partially only. Out of the 1.35% fall in repo rates, it is estimated that 0.46% benefit was only passed on by the banks notwithstanding that changes in the lending rates have been automatically linked to banks’ benchmark lending rates. One of the major factors coming in way of transmitting 100% cut in repo rate was attributed to interest rates being paid on deposits. The scope of reduction in interest rates on deposits is limited to the extent that it does not hurt interest rate margins of banks. Now that inflation has started raising its ugly head and in the light of tensions in middle east crude prices are showing uptrend so it will become difficult for the RBI to make more downward revisions in repo rate in the near future. But there is a school of thought which is of view that for revival of growth, RBI should cut repo rates. Further, it is expected that the major reason of hardening inflation is the food inflation which have crossed 14%. This happened due to 400 percent increase in Onion prices and 60 percent rise in vegetable prices due to inclement weather. In coming months it will come down and so the overall inflation. In view of this repo rate could be safely reduced to push up growth in the economy.

Thus it would be necessary to mention that whatever steps have been announced by the government and Reserve Bank of India so far cannot yield results in the short term due to confidence in the economy and other factors examined earlier. So there has to be some out of box thinking whereby public may have more money in its hands instantly and start spending to stimulate the economy. Govt. is believed to working on such measures with due consultations from various stake holders or persons who matter.

PROSPECTS OF RECOVERY IN NEAR FUTURE?

The Growth projection for 2019-20 has been revised downward once again by various agencies as follows: United Nations 5.7% (7.6%); CSO 5%, RBI 5% (6.1%), SBI 5 %( 6.1%); World Bank 5% (6%); ADB 5.1% (6.5%); Moody 5.6% (5.8%) and Namura 4.9% (5.7%). (Figures in brackets are earlier estimates). Incidentally these growth rates are lowest in 11 years. Our earlier narrative envisaging that we are the fastest growing country and even better than china is gone to wind since China is expected to grow by 6.1% even in 29 years as against ours 5%. Reason being that all the 3 drivers of GDP namely Consumption, investments and exports are not showing signs of any perceptible improvement due to headwinds.

So far as consumption demand led recovery is concerned, it is likely to remain tepid with concerns on economy like low rise in incomes, rural stress , lack of credit dragging down demand etc. as touched on earlier. The consumer confidence level in the economy has touched lowest level since 2014. Since employment level has grown by only 6.1% and unemployment level has touched 45 years highest. Consumers are not taking chance to spend as many of them do not know when they can become vulnerable to unemployment. This has affected the demand level in the country adversely. Since clarion calls are being made by our PM and progressive steps have been already taken let us hope for some breakthrough in times to come.

So far as investment from corporate side is concerned unless consumption picks up resulting into utilisation of excess production capacity and corporate gain confidence in the economy, this may not happen too soon.

As far as exports are concerned, they also remained quite sluggish during the last 8 months. The prime reason for the down turn in exports could be ascribed to our inability to maintain export competitiveness and that is why even smaller countries of like Vietnam, Bangladesh, Indonesia have surpassed us. Further global growth has also slowed. However at present some hopes are left on some future events. Export demand will largely be dictated by events like 1. Successful graduation of UK in Brexit on Jan 31, 2020 and 2. Conclusion of trade related talks between United States and China which could be signed in phases and first phase could materialise soon. Since Trump is interested that the negotiations should be concluded before US selection it may materialise at the earliest 3. There are feeble sign of recovery in global growth which may have positive impact on our exports.

WHAT REMAINS TO BE DONE?

Now, Union Budget is one of the economic events which countrymen are waiting as it may contain measures which can help in reinvigorating economy in the short run. Coupled with the measures already announced to start working and those to come in the Budget will reinforce the process, there are good chances that recovery could start. However, no one knows about disruptions due to sudden headwinds on the international and domestic economic scenes. Signs of such happening are feebly visible on the horizon and they could precipitate such unfvourable events. To mitigate such possibilities wish lists are being worked out by Finance Minister through consultations with Industrialists, Economists, Academicians, Associations and Chambers of Industries to incorporate desired measures in ensuing budget.

Rejig in the personal income tax is one of the areas which is understood to be under close attention of Government for implementation as any Income tax sop will leave lot of money in the hands of people which they can spend and it will stoke demand. In this context Govt is weighting recommendations of the task force on Income tax. In the light of suggestions various slabs of income tax may be juggled to give relief to public. Now whether it will happen is a difficult to answer? Reason being that public may not spend the money in view of losing confidence in the economic recovery. Further, today most of the employees have developed a phobia of losing job so they are saving money for future and not spending to the desired level. Further food inflation has also started pinching them and household spending has increased. This could reduce the savings they ought to have had made. Thus the sop could also meet the same fate as happened in case of corporate tax. However there could be a definite change in the sentiments towards the economy and trigger growth may be after some time.

Government may also announced reshuffled rate in the GST rate especially for some sectors facing the rigours of slow down. This will obviously help in fighting with slowdown.

Considering the role of stock Market and ensuring that it remains vibrant, the ensuing budget could have certain measures in this regard. For example there could be exemption of equities from Long term capital Gain Tax beyond 2 years of holding. Implementation of this measure could ensure vibrant capital market and bringing an improvement in the investment climate.

CHALLENGES:

Some of the challenges which the economy has been facing have already been mentioned earlier. For tackling the slowdown through pump priming, the Government has already declared the programme of massive spending of Rs. 1.4 lakh crores on infrastructural developments. This is done considering that monetary measures have not been working to effectively tackle the slowdown and Government expenditure has to be raised massively.

But in the light of latest developments, it is observed that Govt has been facing the resources crunch due to low collection of tax revenue. The bloated fiscal deficit has also tide the hands of Government to spend on various developmental scheme and infrastructure. The tax collection of the Government remained below the targeted level. The projection of growth rate net of taxes on products has been lowered from 8.8% in FY 19 to a mere 5.8% in the current year. Per advance estimate of net taxes, it is reported that due to inadequacy in collection of GST, the Central Government is finding it difficult to compensate States. Of course GST collection has shown an improvement to Rs.1.03 lakhs crores in the last month but then unless we see a trend of an increase, it is very difficult to say whether things would really improve. Government is already working on how to increase GST collection through plugging loopholes of evasion, rejigging the GST rate to increase productivity and also bringing new items like petrol and wine on the other. Regarding collection from direct taxes, Government has already become poorer by cutting corporate tax to the tune of Rs. 1.45 lakh crores. So how during the current slowdown it will be able to recoup the losses is yet to be seen with clarity. For tackling resources crunch Govt has decide RBI to transfer its surplus. It has also issued directions to public sector companies to declare higher dividend payout.

Fiscal balancing has also become a challenge for the country. During April – Nov. 2019 country’s fiscal deficit reached Rs. 8.08 lakhs crores which was 7.19 lakh crores a year ago during the same period. The fiscal deficit is expected to cross budgetary deficit from 3.3 % to about 3.8- 4% 

While everyone is optimistic of emergence of US China trade negotiations may be nearer but what another headwind has just thronged the world following killing of Iran’s top General Soleimani. Now while US have given a serious threat to Iran to destroy it. Further, while US has indicated that it has already marked 52 places for attack, Iran has threatened to undertake missile attacks on 100 marked placed in US. Thus in the event of a large scale war and resultant destabilisation of Middle east oil prices could rise at a whopping level creating worse problem for the world. It will be worst for India since it depends on oil imports to meet 80% of its requirement from Middle East. Estimates are there that one dollar increase in prices of oil could add more than Rs.3100/- crores to our oil bill. Oil prices has increased to $70 a barrel and could go to even $90 a barrel. So the advantage of low oil prices which this Government is enjoying may not be available with serious consequences in the event of widening external trade deficit. 

To conclude although India has been passing through severe slowdown and has been facing various headwinds, Government has been firing all cylinders to beat the downturn. With various important measures taken and some more is expected to be covered under ensuing Union Budget to beat the slowdown would help to extricate economy from current slowdown within 3-4 quarters.

Author could be reached on [email protected] for any comments please

…………………………………………………………………………………………………Dr. Banshi Lal Srivastava, a free lance economist ; Ex General Manager (Strategic Planning, MIS and Branch Expansion) Bank of Baroda; Ex Associate Professor in SASMIRA Institute of Management and Research, Ex Executive Manager Neelysis India, Vishakhapatnam.

Views are personal and not necessarily related to organisations he served.

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