The dynamics of India's growth slowdown

12-September-2019 by Virtue Ventures

ü  The crisis brewing within the Indian economy has gained unanimous acceptance by now. Even the latest annual report of the RBI for the fiscal year 2018-19 (or FY19) confirmed that the Indian economy has indeed hit a rough patch.

ü  The GDP growth rate of the economy has slipped to 5 per cent in the first quarter of FY20, the lowest in over six years. This is an indication of tougher times ahead. Be it the recent collapse of the automobile sector or the rising number of non-performing assets (NPAs), sluggish consumer demand or failing manufacturing sector. All have a hand in this deceleration of the growth rate.

ü  This is the third instance of an economic slowdown for India in the past decade after the ones that began in June 2008 and March 2011.

ü  The technical term for the same is growth recession. A recession is defined in economics as three consecutive quarters of contraction in GDP. But since India is a large developing economy, contraction is a rarity.

ü  The growth of the Indian economy had been predominated by consumption inclusive of both Private Final Consumption Expenditure (PFCE) as well as the Government Final Consumption Expenditure (GFCE).

ü  In addition to these factors, the slump in the economy is also affected by the various exogenous factors. A leading dampener is the US-China trade war, which has intensified over time and has contracted world trade and, in turn, Indian exports. Also, high rates of GST, liquidity crisis in NBFCs, and shift in the behavioral pattern of the workforce due to the entry of young people has discouraged savings. When people save less in the economy, it leaves less money for investments.

v 5 indicators for the recession

1.  The Unemployment Rate

ü  India’s rate of unemployment doubled in the past two years, According to the State of India’s Environment (SoE) In Figures, 2019. This has particularly affected young graduates.

ü  According to the report, the unemployment rate has gone up from four percent to 7.6 in the last two years (May2017-April 2019). The unemployment rate in April 2019 was the highest in two years. The rate for rural areas in this month was also the highest in this period.

2.  The Yield Curve

ü  The yield refers to the interest earned on a bond till it matures. A yield curve is a graphical presentation showing the relationship between a bond’s yield and its maturity. A yield curve describes the relation between yield on a short-term bond (referred to as the short end of the yield) and a long-term bond (referred to as the long end of the yield).  It shows the investor’s expectations on future interest rates. The yield curve is also used as a leading economy indicator.

3.    India Manufacturing PMI

 The IHS Markit India Manufacturing PMI dropped to 51.4 in August 2019 from 52.5 in the previous month and below market expectations of 52.2. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since May 2018, as output rose the least in a year and new order growth slowed to a 15-month low, with overseas sales increasing at the softest rate since April 2018.

 At the same time, purchasing activity fell for the first time in 15 months. Subsequently, holdings of raw materials and semi-finished items declined, ending a 17-month period of accumulation. Meanwhile, employment rose only marginally, while backlogs of works were unchanged. On the price front, inflation accelerated to a nine-month high, though remained moderate and below its long-run average.

Lastly, business sentiment strengthened to a 16-month high, amid hopes of a pick-up in demand and marketing efforts. Manufacturing PMI in India is reported by Market Economics.

4.     Consumer Sentiment Index:

Consumer Confidence in India decreased to 95.70 Index Points in the third quarter of 2019 from 97.30 Index Points in the second quarter of 2019. Consumer Confidence in India averaged 103.10 Index Points from 2010 until 2019, reaching an all-time high of 116.70 Index Points in the fourth quarter of 2010 and a record low of 88 Index Points in the third quarter of 2013.

5.    Choose Your favorite

The indicators above are among the most common inputs into the formal models that economists use to forecast recessions.

Temporary staffing levels: India currently has 1.3 million temporary workers in the organized sector. Experts predict that by 2025, 10% of the overall workforce would be working as contingent workers through various staffing companies.

üDomestic car sales: During April to June 2019, car sales fell by 23.3% in comparison to the same period in 2018.  This is the biggest contraction in quarterly sales since 2004.

 A slowdown in car sales negatively impacts everyone from tire manufacturers to steel manufacturers to steering  manufacturers etc.

üHousing sales: According to the real estate research company, India’s top 30 cities had 1.28 million unsold  housing units as of March 2019, a jump of 7% from March 2018, when the number was at 1.2 million. This means   that builders are building new houses at a faster pace than people are buying them.

The real estate sector has forward and backward linkages with 250 ancillary industries. So, when the real estate   sector does well, many other sectors, right from steel and cement to furnishings, paints, etc.

üExpenditure and net exports: Government expenditure tends to form around 10-11% of the Indian economy (in current terms, without adjusting for inflation). In the last two fiscal years, the growth in government expenditure  was at 19.1% and 13.2%, the highest since the financial crisis years of 2008-09 and 2009-10 and was instrumental  in driving economic growth to some extent.

ü  Net exports: This figure for April to June 2019 stood at -$46 billion. This was almost similar to the net exports for April to June 2018 at -$46.6 billion. This is primarily because both exports and imports during the period were at almost similar levels as last year.

v Causes for the Present Slowdown in the Indian Economy

ü  The Effect of Demonetization

a)    Indeed, Demonetization can be said to have contributed too much of the slowdown as the Double Whammy of demand collapsing, and supply bottlenecks mean that there is a broad slowdown across the entire value chain of the demand and supply dynamics.

b)  Thus, what we have is a situation wherein cash has dried up leading to a slowdown in the economy.

c)  One must also take note of the fact that it is not only private consumption and small enterprises causing the slowdown.

d) Indeed, the Big Corporates are as much to blame since they are drowning in debt that they accumulated during the Boom Years of the first decade of the 21st century.

e)   It is also a fact that this has contributed to a freeze on investment by industrial houses and corporates who are now paying down the debt or postponing debt repayments to ensure that their present cash flow is sufficient to remain in business.

ü  Too Much Debt

a)    Added to this is the fact that most Public Sector Banks are saddled with high NPAs or Non-Performing Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans.

b)  Indeed, absent recapitalization of such banks by the government, one might very well see a vicious cycle wherein bad debts and demand collapse lead to no lending and no fresh investment in addition to any consumption.

c) The cycle has to be broken somewhere, and this is where the Government and the RBI or the Reserve Bank of India have to take concerted action.

ü  Rollout of GST

 a)  Fourth, the fact that the rollout of the Goods and Services Tax on a nationwide basis has led to the slowdown cannot be denied.

 b) Indeed, GST has hampered the small businesses more than Demonetization by forcing them to withhold inventory until they migrate to the GSTN or the GST Network and become compliant with the numerous rules and regulations that are part of this tax.

 c) It can be said that the implementation of GST is also flawed thereby exacerbating some of the factors that have contributed to the slowdown.

ü  Global Slowdown

  a) It is not these factors alone, and the most important factor is that there is also a global economic slowdown that is happening and given the fact that India is a net commodity exporter, there has been a slump in the volumes of exports.

ü  Retreat of Globalization

a) Hence, what the slowdown means for professionals and fresh graduates is that they would be finding it harder to land jobs as well as see their salaries rise year on year basis. In addition, the policies of the Trump Administration have contributed to a decline in the number of students and professionals going to the United States and added to this, Brexit uncertainties have compounded the situation.

 b) It looks as though that the combined effect of all these factors means that the Indian Economy is likely to remain in the doldrums for some time to come.

ü  Ride out the Storm

 a)  Lastly, the slowdown is also part of a longer-term structural shift wherein the Economy is shifting gears from the high investment era to a low investment era as well as a transition from being cash-driven economy to a digitally enabled economy.

 b)  Indeed, this can be seen most in the Real Estate Sector that has come to a grind in recent months and hence, has also contributed to the slowdown. All in all, all the factors have caused a Perfect Storm for the Indian Economy, and there has to be a time lag before one can reasonably and realistically expects a turnaround.

 c) To conclude, the best option now for all stakeholders would be to Ride out the Storm.