Indian economy limps through 2019 – Part II

Pro-government economists have been making a lot of optimistic noise regarding the revival of the flagging economy. They are expecting that economy will start recovering from the first quarter of the next financial year. However, they have not yet come up with any solid reason why any sort of recovery will begin any time soon. Despite the slight easing of the trade conflict between the US and China and the decisive British election, the Indian economy has not benefited much. Neither have the government initiatives to revive the economy have had any impact so far. As the economy spirals further down towards the nadir, the government is busy with turning discriminatory Bills into weird Acts while the whole country burns.

Union Finance Minister Nirmala Sitharaman made a fantastic claim while replying to a question in the Rajya Sabha on November 27. She said, “If you are looking at the economy with a discerning view, you see that growth may have come down but it is not a recession yet, it will not be a recession ever.”

In a recent interview to Huffington Post, the India chief of IMF Ranil Salgado admitted that the institution has been wrong in its assessment. He also accepted that the slowdown wasn’t cyclical but structural. Although he seemed impressed by certain government measures to revive the economy he said it couldn’t happen without significant investments in education and health. In case people have forgotten let me remind them that the government recently decided to clip Rs 3,000 crore from the education budget. Although improved financial transmission and a possible quick resolution of global trade tensions maybe some possible upsides to growth projections but a delay in the revival of domestic demand, a further slowdown in global economic activity and geo-political tensions can also prove downside risks.

The GST Council has decided not to tamper with the tax rates. While there is an advantage of this move, there are also negatives to it. The government has been falling short of its targeted collections and a hike in the rates would have helped in this regard but, on the other hand, animosity between the Centre and some states has been intensifying due to delay in payouts to the states. Tax cuts usually put the saved money directly into the hands of consumers, which they can spend on other goods and services. From a macroeconomic point of view, this is a time to cut both personal income taxes and indirect taxes. That would be the quickest way to push demand and correct the cyclical downturn in demand. This what the experts say but this downturn isn’t cyclical, it is a structural anomaly. NITI Aayog Vice-President Rajiv Kumar seems optimistic about the state of the economy. He feels despite all odds the economy will grow by six per cent or maybe more. But how, he doesn’t know.

Despite general expectations, the RBI kept key policy rates unchanged keeping in view the rising inflationary trends. Disappointingly, real GDP growth for FY20 is revised downwards from 6.1 per cent in the October policy to five per cent for FY20

According to a PTI report, the previous low was recorded at 4.3 per cent in the January-March period of 2012-13. The GDP growth was at seven per cent in the corresponding quarter of 2018-19.

The gross value added (GVA), a measure of the value of goods and services produced in an area, industry or sector of an economy plunged to a near ten-year low. A lot of so-called experts have been citing the rising stock exchange indices as a sign of a healthy economy. But that is a very poor way of looking at the economy. Stock exchanges do nothing for the health of an economy. The slowdown is visible across other sectors as well. Construction sector GVA grew 3.3 per cent in July-September 2019 compared to 5.7 per cent in the previous quarter and 6.8 per cent in the second quarter of the previous fiscal year. The GDP growth in 1H-FY20 has averaged at 4.75 per cent.

Right from the days of demonetisation Indian real estate has been devoid of any appreciable forward momentum and it has continued in the same vein 2019. Dwindling consumption, lacklustre investment and the global slowdown overshadowed all possibilities for growth.

The real estate sector’s performance – a reliable barometer of India’s overall economic health – painfully reflected the macro-economic state of affairs. The liquidity crisis did not relent and dented any ‘real’ growth during the year.

As Johnny-come-lately, the apex bank in its fifth bi-monthly policy review sharply lowered GDP growth projection for the entire fiscal to five per cent from 6.1 per cent. RBI also revised its headline retail inflation projection upwards to 5.1-4.7 per cent for the second half of 2019-20. Putting pressure on household expenses, retail inflation is likely to remain “very high” in the upcoming three-four months before a possible dip in the first half of 2020-21.
However, there are chances that it may take longer as inflation is influenced by a number of factors. While RBI could ask banks for faster transmission of lending rates, it needs to team up with the government and cater to the needs of stressed sectors like banking, manufacturing, construction, automobile and real estate. Banks have only transmitted 0.6 per cent of 2.25 per cent repo cut by RBI, choking up the economy

There’s really nothing to cheer for RBI repo rate cut though it means everything and yet results in nothing. Because the economy is choked up as India’s public and private sector commercial banks have collectively choked up the domestic economy by refusing to pass on the repo rate cuts to the consumers and the industry for the past five years. Consistently high interest rates have dissuaded the industry from borrowing to invest in greenfield projects and plant expansions. India’s private investment is at a 14 year low, according to CMIE.

The National Statistical Office (NSO) released the GDP estimates for the Q2 of FY20 showing a sixth straight fall in the quarterly GDP growth – from 8.1 per cent in Q4 of FY18 to 4.5 per cent for Q2 FY20. Manufacturing, which contributes 77.6 per cent to the IIP, was growing at a much higher rate earlier – at a simple annual average of 10 per cent between FY05 and FY11 (base 2004-05) – but had fallen to just four per cent of simple annual average growth rate between FY12 and FY19 (base 2011-12). Simple data can confuse and confound. For example, the latest monthly data of the CMIE shows an unemployment rate of 7.48 per cent in November – down from 8.45 per cent in October 2019. But the labour force participation rate (LFPR) – which reflects how many of the labour force (those either working or looking for work) are employed – fell to a new low of just 42.37 per cent.

There is broad unanimity among the various experts about uplift in 2020. Private sector consensus prediction is that GDP will grow above six per cent in 2020-21, the next financial year. The RBI expects an early comeback — an average 6.1 per cent in April-September 2020. And the International Monetary Fund’s October World Economic Outlook forecast India’s GDP growth accelerating to seven per cent in 2020, up from 6.1 per cent in 2019. Incidentally, these are the two institutions, the RBI and IMF, which were the last to revise their earlier projections. This optimism is presumed upon an uptick in spending and production from monetary and fiscal policy support, namely, enhanced pass-through of cumulative monetary easing in 2019, lower business taxes, partially eased labour regulations, further counter-cyclical stimulus expected in the forthcoming budget, and other sector-specific relief measures. An improved rabi crop outlook owing to robust monsoons adds to this optimism. Progressive improvement in liquidity and financing conditions of the stressed non-bank sector is also anticipated.

However, most segments are fundamentally weak or strained. A quick health check shows businesses and consumers are less than fit. Many large firms are still to deleverage, regain balance sheet strength to contemplate investing afresh.

The protracted slowdown has slowed this process. It has also tipped newer firms into this pool, adding fresh bad loans to the existing stockpile of non-performing assets and aggravating overall stress. Consumers or households, also increased their liabilities in the last two years in which income growth slowed, not an ideal situation for borrowing or spending more. The weakened capacities could therefore mute the magnitude of aggregate demand response, or private investment and consumption.

The public or government sector is increasingly strained. This is a large segment with significant economic influence through taxation and expenditure policies. To elaborate, higher government spending alone contributed 1.9 percentage points to last quarter’s GDP growth of 4.5 per cent. But now, the government is cash-strapped. On the revenue side, it is affected by declining economic activities that reduce tax collections as well as recent tax cuts; committed expenses strain the expenditure side. The resource constraint is posing a difficult choice, whether to axe spending or raise taxes. Either will result in further demand compression. It is to be hoped such a vicious spiral does not set in.

Indian Economy Limps through 2019 – PART I

Article by – Arijit nag
Arijit Nag is a freelance journalist who writes on various aspects of the economy and current affairs.
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