In less than a fortnight, officials will dump crucial, but disappointing data on us. On August 30, when the Central Statistics Office reports its quarterly health check on the economy, chances are GDP growth for the June quarter will see a fresh low of 5.4-5.6 per cent from March’s 5.8 per cent, which itself was a five-year-low.
And the architects of India’s ongoing boom-to-bust cycle, by majority opinion, are none other than its own government and its intellectual wrong-turns, and institutions like the RBI, and its tight monetary policy.
There’s also unavoidable trouble from abroad due to the deepening US-China trade war, global economic slowdown, Brexit uncertainty and brief, but consistent global oil price and currency shocks.
Part 1 of the series | Global meltdown: India needs to kickstart the growth engine
As we course through the slump, the government hasn’t gotten around to naming the nature of the slowdown. Prime Minister Narendra Modi in recent interviews told us what was done and will be done, but not what caused it.
Part 2 of the series: Worldwide recession months away; is India prepared for the worst?
For now, whether it’s a structural or cyclical slowdown depends on who you are talking to. Optimists and their undying country spirit see the slump as a pass-through, but ‘professional pessimists’ fear the problem is deep-rooted. Knowing the nature of the slowdown helps deploy the right monetary or fiscal policy prescriptions.
What we need is a truth-teller, but in its absence, all those with a neutral view sound sensible.
“It’s a combination of both structural and cyclical slowdowns. For instance, there are structural factors like declining wages that’s affecting demand. There are also cyclical issues at play like the NBFC crisis that need immediate attention,” Dr Sowmya Kanti Ghosh, Chief Economic Advisor, SBI, told this paper.
High-frequency indicators are flashing red
A synoptic view of high-frequency indicators like auto sales, exports, investments, wages and savings reveals the real magnitude of the crisis at hand, though none has a clue how it may all end.
The auto sector, the first to flash danger signs, has been struggling for a year. Weak consumption and regulatory changes leading to higher costs and credit unavailability exacerbated by the NBFC crisis, left the sector in a slump last seen two decades ago. At first, automakers tried cutting production, and when it didn’t help, they started shutting plants in short spells. This has a multiplier effect.
The first casualty were auto dealers. The unprofitable ones snapped out in no time, while others are barely scraping through. The severely-hit back-end comprising auto component suppliers, who besides halting production, did the only thing they could to survive — cut jobs. On last count, the sector rendered at least 2.15 lakh unemployed. If left unaddressed, this number could blow up to 10 lakh.
“Such shutdowns don’t happen often in the components industry and it’s concerning because most are tier-II and tier-III firms. When sales fall during such a prolonged period, they have no choice but to shut shop as working capital dries up,” observed Vinnie Mehta, director-general, ACMA, a trade body.
Twin evils
The employed lot are upset too, as their incomes are stagnating.
And the full import of the twin evils - high unemployment and low wages - unleashed a war on demand, as customers delayed discretionary spend. Even the much-touted 7th Pay Commission dole failed to spur a buying frenzy.
“The gap between disposable income growth and inflation has been narrowing. There has also been a decline in household savings over the past few months, indicating that people have been dipping into their savings more. Such an environment nudges consumers to stay away from big-ticket purchases,” explained Kumar Kandaswami, Partner, Deloitte.
In particular, rural wages growth plunged to 5 per cent from 28 per cent in FY14. Weak rural demand and inflationary pressures, in turn, dented FMCG volumes that fell 10 per cent in June quarter. If initially the softening was driven by impulse food categories, gradually it gripped even essential and non-food categories.
Consequently, Hindustan Unilever’s volume growth reduced to 5.5 per cent in June quarter from 12 per cent last year, while Marico and Dabur’s fell from 10 to 7 per cent and 21 to 6 per cent respectively.
“Rural, which accounts for 37 per cent of spends for the sector, is slowing down at twice the rate of urban markets,” said Sunil Khiani, Head-Retail Measurement Services, Nielsen South Asia.
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Slowdown in spending
Urban consumption too is skidding.
Until recently, consumer spend was going gangbusters, leading to a belief that foreign holidays and Italian kitchens is the new normal. Far from it, the slowdown in even day-to-day household spending on as little as Rs 5 biscuit packs - as admitted by Britannia - threw a wrench in the economic growth wheels.
Reduced consumer spend also affected textiles industry, with fashion and lifestyle retailers reducing production despite the ensuing festive season.
1.28 million unsold homes
Meanwhile, the slump in the real estate sector that started post-demonetisation is worsening with unsold inventory aggregating 1.28 million units across 30 cities and needs 3.5 years to clear up, according to research firm Liases Foras.
Though government measures like lower GST on affordable housing helped to an extent, trouble came back in no time led by the NBFC liquidity crisis.
“The sector has been witnessing tough sales, which will likely continue,” said Shishir Baijal, Chairman and Managing Director of Knight Frank India.
Steelmakers hit too
The real estate sector has long been in the dumps, but the sulkiness has now spread to steelmakers, forcing companies like Tata Steel and JSW Steel to place all their bets on the proposed Rs 100 lakh crore infrastructure investments.
“Going by the manifesto of political parties, we expect this momentum of government spending to be continued by the government. Steel demand should continue growing at 7-7.5 per cent this fiscal,” said Seshagiri Rao, Joint MD, JSW Steel.
The trigger
But just how did we reach here?
During Modi-I, growth appeared undefeated, but the government shot itself in the foot with measures like demonetisation, which broke India’s back. Although official data concluded that in the year of demonetisation, i.e., FY17, the economy was unbelievably at its finest 7.1 per cent, we now know that demonetisation was nothing but a precursor to hardship. We don’t know what it delivered (besides increasing tax compliance) and we may never even know.
But history tells us that culprits never leave in isolation and though none admits it, it affected consumers, industry and MSMEs - the backbone of India’s economy - which took the sharpest hit. Despite repeated efforts such as Mudra loans or the 59-minute loan approvals, recovery remains elusive. Hard on the heels of the demo came GST, which even after two years is yet to find its feet. Finance Minister Nirmala Sitharaman is in no hurry, concluding that GST’s star performance will come only after FY22.
The telecom time bomb
Then there are telecom operators sitting on the edge ready to release another bout of bad loans to banks. The industry is over-indebted, partly due to high spectrum prices and low revenues, while intense competition from Reliance Jio has left players in perennial losses.
Despite rapid consolidation, forced closures and bankruptcy filings like Reliance Communications, recovery appears several quarters away. Even state-run BSNL and MTNL are hit hard by mounting debt, intense competition and steep wage bills that consume about 80 per cent of its revenue.
“Debt repayment and high-interest costs have been a drag on the profitability and cash flows. Another reason is high government levies - in excess of 30 per cent - one of the highest in the world. The third reason is hyper-competition driven by unsustainable low tariffs,” said Rajan Mathews, director-general, Cellular Operators Association of India.
A sliver of hope
A cursory look at other key components of the GDP namely agriculture, investments and exports, too, tell the same slowdown story. The domestic savings rate fell nearly 7 per cent post-2008 crisis, while share of private investments in new projects declined from 50 per cent between FY07 and FY14 to 30 per cent now. That global trade downturn sharply stunted our exports and dragged domestic demand is indisputable.
For instance, under Modi-I, exports grew 12 per cent as against an enviable 75 per cent seen under UPA-II. Similarly, if services exports shot up 30 per cent under Modi’s watch, they did better under UPA-II at 54 per cent growth.
According to the Centre for Monitoring Indian Economy, going forward, exports will likely remain subdued, owing to the slowing global economy and unresolved trade wars. The only good news is that a death knell hasn’t been rung, so there’s hope.
Notwithstanding the slowdown, drumbeats are all over the $5 trillion growth target - our ongoing Sacred Dreams story - but while the government is at it, in the short run, it should be worried, very worried of a hard landing.