Why this economic slowdown is serious
Suppose you inherited a farmland and a house. You grow your own food using family bank of seeds. You don’t use chemical fertilisers and prepare organic manures using cow dung and similar stuff on your own. You don’t buy fodder for your cattle or poultry which fulfil your milk and meat requirements. You use biogas as fuel for household energy. This means you have a self-sustained viable economy. But you are contributing nothing to country’s gross domestic product (GDP) as you are not using money.
Now, consider this. Your neighbour works in a factory and earns a salary. She buys grocery from a kirana store, milk and butter from a dairy parlour, clothes from a shopping mall, dines out and watches a movie or a play on weekends, employs a help in her home and pays taxes. Her activities are the guarantee that the country’s GDP clock is ticking upward.
Every single purchase by her begins a chain of purchase and sale. The kiranawallah goes to wholesale market to buy stuff for shop. The wholesale market sources its supplies from the farmers, who purchase seeds, fertilisers, tractors, diesel and employ labourers on their fields. All are paid in money. This is repeated for every single purchase by your neighbour. She ensures flow of money that defines growth of measurable GDP.
This chain of sale and purchase has shown signs of slowdown over the past few months. It is visible in almost every sector of the Indian economy. The result was worrisome for 2018-19, for which the GDP growth rate was 6.8 per cent.
This is the slowest growth rate of GDP since 2014-15. The previous low was 6.39 per cent in 2013-14 following which the Narendra Modi government came to power in 2014.
Recent GDP figures have only aggravated the concerns of economic slowdown. According to Central Statistics Office, India’s GDP slowed to a five-quarter low of 6.6 per cent in October-December 2018.
It fell below 6 per cent mark in January-March 2018-2019. At 5.8 per cent, the March quarter growth rate pushed India behind China after seven quarters. But that rivalry is the least of the worries for Indian economy. There are ominous signs showing that slowdown is deep.
Automobile sector is facing its worst crisis in 20 years. Reports say around 2.30 lakh jobs have been lost in the auto sector. A large of it is being blamed on the global trend accentuated by the Brexit situation.
But what signals a deeper problem is the Society of Indian Automobile Manufacturers (SIAM) report that 300 dealerships have shut down in recent times. Sales of cars, tractors, two-wheelers have declined considerably. SIAM said about 10 lakh jobs have been hit in the auto component manufacturing industry.
The health of real estate is a massive indicator of the state of Indian economy. It has links with about 250 ancillary industries — bricks, cement, steel, furniture, electrical, paints etc — and affects them all if there is a boom or gloom in the sector.
Reports are that the volume of unsold houses over the past one year has increased in the top cities of the countries. According to real estate research company Liases Foras, the unsold inventory currently stands at 42 months.
This means it will take three-and-a-half years for the existing unsold inventory (read flats/houses) to clear up. An efficient market maintains 8-12 months of inventory, the company said.
FMCG at slow pace
The fast-moving consumer goods (FMCG) companies have reported decline in volume growth in the April-June quarter. This has been blamed on a sluggish rural demand, which, in turn, indicates less availability of money in villages.
Reports say that the demand for FMCG in rural India was growing at 1.5 times of the urban demand. The rural demand has come down to the level of urban growth or below.
FMCG major Hindustan Lever reported volume growth of 5.5 per cent in April-June quarter compared to 12 per cent last year. Dabur posted a growth of 6 per cent against 21 per cent last year.
Britannia Industries recorded a volume growth of 6 per cent against 12 per cent in the same period last year. Asian Paints saw a volume growth slump from 12 per cent in April-June quarter last year to 9 per cent this year.
Bank’s lending to MSME
At macro-level, lending by banks to industries shows a significant jump from 0.9 per cent in April-June quarter in 2018 to 6.6 per cent for the same period this year. This should reflect in job growth in industries but the employment situation is dismal.
While the labour force survey, released by the government in July, showed a record high unemployment rate of 6.1 per cent for 2017-18, recent Reserve Bank India report does not present a brighter picture. The RBI consumer confidence survey showed a drop in consumer confidence for July over pessimist situation in job creation and overall economic scenario.
This contradiction is explained in the details of pattern of lending by banks, which have extended credit to big industries while money flow to medium- and small-scale enterprises, which are the biggest employers.
The credit to big industries grew by 7.6 per cent during April-June compared to 0.8 per cent last year. Lending to MSME (micro, small and medium enterprises) by banks has actually slipped from 0.7 per cent in 2018 to 0.6 per cent this June quarter.
Government’s hands tied
Market-based economies thrive on hope and belief of profit by private entrepreneurs. When market sulks under negative sentiments in the market, the government infuses money to bring back hope. But the central government’s hands are tied.
In India, the government expenditure accounts for around 10 per cent in the economy. With the government sensing an economic slowdown, it increased expenditure by 19 per cent in 2017-18 and 13 per cent in 2018-19. This was the highest increase in government expenditure since 2008 financial meltdown.
To do a repeat, the government needs more money. But revenue collection is moderate for April-June quarter — at Rs 4 lakh crore registering a growth of less than 1.5 per cent. To put in perspective, the gross tax collection growth for April-June 2018 was over 22 per cent. Simply put, the government does not have enough money to invest in the economy.