As the Finance Ministry scrambles to cushion the freefall of the Indian economy with capital infusion to provide liquidity, government data released on Monday revealed that the growth of eight core industries has slowed down to 2.1 per cent in July as against 7.3 per cent in the same month last year. The new report paints a grim picture of the service sector which is already suffering from reduced consumption, falling production and increasing job losses as the genesis lies in the crisis at Infrastructure Leasing & Financial Services (IL&FS) and the prevailing stress in Non-Banking Financial Companies (NBFC).
The GDP figures released by the National Statistic Organisation (NSO) revealed that the country’s GDP growth rate has hit a 25-quarter low of 5 per cent in the first quarter (April-June) of the current fiscal. While the government aims for a $5 trillion economy, going forward the slowdown in various sectors is set to make the path difficult for Modi 2.0.
Here’s a lowdown on the economic slowdown and steps the government has taken so far.
Auto sector suffers from poor sales, job losses increase
Automobile companies saw a decline in domestic sales in August 2019 as compared to the corresponding month last year. Hit by the liquidity crunch from NBFCs and a dip in consumer sentiment, July became the twelfth out of the last 13 months in which the auto sector has seen a decline in domestic sales. The dip in sales led to pink slips being offered to employees in an industry which is one of the biggest job creators in the country. The drop in sales is seen across all segments – passenger, luxury and commercial. If passenger vehicles witnessed a fall of 18.4 per cent in the quarter ended June 2019, the commercial vehicle segment witnessed a 16.6 per cent decline. The two-wheeler segment too saw a drop in sales by 11.7 per cent during the quarter.
Country’s largest car manufacturer Maruti Suzuki reported a 33.5 per cent decline in total sales in July. The company had sold 1,64,369 in July last year, Maruti MSI said in a statement.
Along with the automobile, tractor sales have consistently fallen since March 2019, amidst weak farm sentiment.
GDP at 25-quarter-low of 5%
Days after the RBI revised its GDP projections, slow consumption, fall in manufacturing dragged the GDP to a 25-quarter low of 5 per cent in the first quarter of FY 2019-20. The GDP growth rate has now slowed for the fifth consecutive quarter with the previous low recorded at 4.3 per cent in March 2013. Modi government, which has been pegging the economy to be stable is facing criticism from all corners with the former prime minister Manmohan Singh taking a dig at the economic policies of the government. Singh, in a statement, blamed the “allround mismanagement” by the Modi government for the economic slowdown and urged the government to put aside politics of vendetta and reach out to all sane voices to steer the economy out of this “man-made crisis”.
RBI cuts Repo Rate
The Reserve Bank of India slashed the Repo rate for the fourth consecutive time, reducing the policy repo rate by 35 basis points from 5.75 per cent to 5.40 per cent on August 7. The lending rates were cut in a bid to augur the economic activity amidst a consumption slowdown. The previous three cuts this year were 25 basis points each. Alongside a cut in the repo rate, the central bank also lowered its GDP growth projection from 7 per cent in June policy to 6.9 per cent now. The monetary policy statement said that “inflation is currently projected to remain within the target over a 12-month ahead horizon. Addressing growth concerns by boosting aggregate demand, especially private investment assumes the highest priority at this juncture while remaining consistent with the inflation mandate.”
Govt unveils measures to boost lending
In a first sign of government addressing the economic woes, Finance Minister Nirmala Sitharaman announced the removal of the surcharge on capital gains on shares for both foreign and domestic investors, provided an upfront Rs 70,000-crore equity infusion into public sector banks to boost lending, and unveiled measures to push automobile sales. The steps come in the wake of a slide in equity markets and a slowdown in demand, saying that, “the pre-Budget position is restored.” The surcharge of 3 per cent and 7 per cent on those earning between Rs 2 crore and Rs 5 crore, and over Rs 5 crore respectively had been announced as part of the Budget proposals.
Sitharaman said more policy measures will be taken in the next couple of weeks including for the housing sector. Meanwhile, providing a balm to the micro, small and medium enterprises, the government announced that all pending GST refunds will be paid within 30 days.
RBI transfers record surplus to govt
In a first of its kind move since its inception, RBI dipped into its own funds to transfer a record surplus of Rs Rs 1.76 lakh crore to the exchequer, nearly double the estimated Rs 90,000 crore in the Budget for 2019-20. The transfer includes Rs 1.23 lakh crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified under a revised Economic Capital Framework (ECF) adopted by the RBI board. The call for the transfer of the surplus by the Centre had been a major bone of contention for former governors including Raghuram Rajan. The decision was taken by the central bank after the board agreed on the recommendations made by the Bimal Jalan committee.
[ie_backquote quote=”“The state of the economy today is deeply worrying. The last quarter’s GDP growth rate of 5% signals that we are in the midst of a prolonged slowdown. India has the potential to grow at a much faster rate but all-round mismanagement by the Modi government has resulted in this slowdown.”” cite=”Manmohan Singh”]
Union Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das arrive for meeting with the central board of directors. (Express Photo by Tashi Tobgyal)
Govt announces mega bank mergers
In her second press conference in a span of 7 days, Sitharaman announced the merging of a number of Public Sector Banks (PSB) in order to revive and revitalise the banking sector with the objective of achieving the $5-trillion economy target. The number of PSBs will come down to 12 from 27 in 2017 following the move that is aimed at making state-owned lenders global sized banks. In what is one of the biggest mergers since the integration of SBI with five associate banks, Sitharamam announced the merger of Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and United Bank of India with a business of Rs 17.95 lakh crore and a network of 11,437 branches, making it the second-largest PSB in the country. Sitharaman also announced the consolidation of Canara Bank with Syndicate Bank to form the third-largest PSB with a business of Rs 15.20 lakh crore. The merger of Union Bank with Andhra Bank and Corporation Bank will form the fourth-largest PSB with 9,609 branches. The government also announced the merger of Indian Bank with Allahabad bank with a business of Rs 8.08 lakh crore, 1.9 times of Indian Bank and covering south, north and eastern sectors.
The chain of events that have unfolded in less than 100 days of Prime Minister Narendra Modi’s second term has now put extreme pressure on the government to find new ways to cushion the freefall of the economy.