There is more bad news on the economy. On Tuesday, data released by the Society of Indian Automobile Manufacturers showed that sales dropped by 18.7 per cent in July — the sharpest decline in nearly 19 years. On Wednesday, data released by the commerce ministry showed that non-oil, non-gold imports, an indicator of domestic demand, contracted in July — they have contracted every month this financial year. The corporate results season also points to depressed demand. Clearly, household demand, which has been the bulwark of growth over the past few years, has slowed down substantially over the past few quarters. Why is this so? And can it be reversed?
Part of the explanation can be traced to household borrowings. Slower income/wage growth over the past few years led to households stepping up their borrowings to finance their consumption. In just two years, household financial liabilities went up from Rs 3.85 lakh crore in 2015-16 to Rs 7.4 lakh crore in 2017-18 — a period that also coincides with the sharp growth of NBFCs. This changed with the collapse of IL&FS. With the crisis engulfing the NBFC sector, the capacity of households to borrow to finance their consumption has been restricted. Bank lending is yet to offset this decline. This raises the question: If growth over the past few years was driven largely by households gorging on debt, which is unsustainable beyond a point, will policy interventions designed to fuel household consumption without addressing the underlying reason, the slowdown in income growth, be the prudent approach?
With the primary drivers of growth struggling, an argument is being made for a fiscal stimulus. Notwithstanding that the budget, which was presented just a few weeks ago, shied away from doing so, the space for a meaningful stimulus does not exist as the government is likely to find it difficult to meet its budgeted fiscal deficit target this year — its tax revenues are growing well below nominal GDP growth. In any case, higher government spending will be counterproductive — it will push up bond yields, restricting transmission of the interest rate cuts by the MPC. Reports also suggest that the government is considering a slew of measures to reverse the slowdown. At this juncture, the temptation to rely solely on short-term palliatives should be avoided. While sector-specific measures, such as addressing the concerns of the auto sector could be explored, the focus should be on addressing the structural issues that plague the economy.