What are the signs to suggest that the Indian economy slowing down?
The economy is indeed slowing down. Many economic indicators point to that. In fact, some analysts started picking up the first signals of a powering down six to eight months back. Anecdotal evidence collected by analysts then is showing up in micro and macro numbers now. For instance, after posting double-digit growth rates of about 14 per cent in passenger vehicle sales during April-June 2018, Maruti Suzuki, the largest carmaker, witnessed declining sales for most months except October 2018 and January 2019, when it posted less than 2 per cent growth. Tractor sales for Mahindra, which has a 40 per cent plus market share, declined in December 2018, were flat in January this year and dropped in February too. Two-wheeler sales started crawling since December. In February, the two biggest two-wheeler producers, Hero MotoCorp and Honda Motorcycle, which account for three-fourths of industry volumes, reported lower sales. Earlier this month, Maruti Suzuki cut car production for March by over 25 per cent. Maruti’s announcement sounded the alarm bell.
What is worrying economists and analysts now is signs of a consumption slowdown spreading to non-discretionary items such as food items. Thus far, it was feared to have impacted only discretionary expenditure – in products such as cars and consumer durables. At the end of the day, India continues to be a consumption-led economy. Consumption expenditure contributes almost 56 per cent of the country’s GDP.
Macro indicators too aren’t presenting any encouraging signs either. First, eight core segments — steel, cement, fertilisers, coal, electricity, crude oil, natural gas and refinery products, which together make up about 40 per cent of industrial production – grew at 1.8 per cent in January this year, compared with 2.8 per cent in the previous month. The growth in industrial output itself dropped to 1.7 per cent in January 2019 against a growth of 2.6 per cent in December 2018. In the corresponding month i.e. January 2018, it had grown 7.5 per cent.
Zooming out further, the GDP growth rate in the first three quarters (April-June 2018, July-September 2018 and October-December 2018) of the current financial year ending March 2019, the Central Statistics Office estimates, was 8 per cent, 7 per cent and 6.6 per cent, respectively. This clearly shows a trend of sequential slowing down and these numbers corroborate the signals that have been visible on the ground.
Why is it slowing down?
Both are complex questions. For instance, the demand for passenger vehicles slowed down during the second half (beginning September 2018) of this financial year because of many reasons — high interest rates, higher fuel prices and lack of credit. Many in the industry say consumers have only postponed the decision to purchase vehicles, suggesting that there is no permanent destruction of this demand.
At a very broad level, demonetisation — a radical policy decision — and introduction of Goods and Services Tax — a structural reform — naturally had an adverse impact on the economy. India has largely been a cash economy, and informal sectors were dealt a harsh blow. Cash was squeezed out of the system, and many small businesses continue to find it difficult to cope with the GST regime. The currency in circulation post demonetisation dropped by about one percentage point, but gross bank credit continued to be in single digits until about March 2018. This was probably one of its objectives. But over the last two years, bank credit slowed down dramatically because banks had to make higher provisions for bad loans. With six public sector banks under the central bank’s prompt corrective action framework, and some others voluntarily having pressed the pause button on lending, retail and businesses found it quite difficult to access credit. Non-banking finance companies compensated for this till the middle of 2018, when a default by IL&FS plunged the NBFC segment into a liquidity crisis. All this while, interest rates continued to remain high. Poor bank credit, liquidity crisis and high interest rates all created a huge drag on the economy. It has been like running a hurdle race set along a steep path with 50 kg on your back, says the CEO of a large mutual fund. Bank credit numbers now suggest that things are looking up, but this is largely because of a low statistical base.
How worried should we be about the slowdown?
A slowing economy always hurts. Put simply, it affects income of people, and does not create jobs. In January this year, the government revised the growth forecast for 2017-18 to 7.2 per cent from the earlier estimate of 6.7 per cent. It also revised the actual growth rate in 2016-17 (the year of demonetisation) to 8.2 per cent from 7.1 per cent estimated earlier. These sharp revisions were heavily contested by economists. In 2014-15 and 2015-16, the first two years of the current government, the economy grew at 7.1 per cent and 8.2 per cent, respectively. The government expects the economy to grow at 7 per cent in 2018-19, which is slower than 7.2 per cent in 2017-18.
To put things in perspective, let us look at what is happening across the globe. After growing at 3.1 per cent in 2017, the world economy is estimated to have slowed down to 3 per cent in 2018, and the outlook for 2019 suggests it will slow down to 2.8 per cent over the next two years. The prospects over the coming three years for both the US and the Euro zone are uninspiring – pointing to continuous slowing down. China’s GDP growth rate is expected to drop to 6 per cent in 2021 from 6.5 per cent in 2018. As the CEO of another large FII said, this is ‘meri kameez tumhari kameez sey safed kaise’ syndrome, or ‘my shirt is whiter than yours’. India seems to be the only economy expected to clock 7.5 per cent growth every year till 2021, according to the World Bank’s latest Global Economic Prospects. India, given its potential, can definitely jump into the 8-10 per cent growth orbit. So naturally, while within India, the narrative is that of an economy slowing down, investors in Hong Kong and New York, are celebrating the Indian growth story. This probably explains the billions of dollars being pumped by foreign investors into the Indian stock market. India continues to be a profitable long-term bet for global investors.