India’s slowdown story is for real and the worst part is that it has still not bottomed-out and could take another couple of quarters. Even the recovery would take a year as is being widely said by many economists.
Much of it can be attributed to the falling consumption across the spectrum, be it private or industrial. Unless that revives, the recovery will be a pipe dream.
Calls for greater government actions on the demand side are growing louder, even if that meant deviation from the fiscal discipline.
As the union government is gearing up for the presentation of next year’s budget, news about the likelihood of personal income tax cuts are doing the round. The government has indicated that it could do that in the upcoming budget announcement, hoping that, with more money in the hands of the people, the spending and consumption could see an uptick.
This tax cut, if undertaken by the government, will be on top of its previous efforts to arrest the falling consumption through support schemes like Pradhan MantriKisanSammanNidhi and National Rural Employment Guarantee scheme, which have not yielded much. According to a media report, the government has pumped-in over 1.5 trillion rupees till now to prop-up the demand side situation.
A data on the gross domestic product (GDP) released by Central Statistics Organisation (CSO) under the Ministry of Statics and Programme Implementation (MoSPI)shows private consumption expenditure decelerated to an 18-quarter low of 3.1% in the quarter ended June. The rural economy has suffered a greater brunt with declining consumption.
Also, a recently leaked draft of the Household Consumer Expenditure survey 2017-18 had allegedly showed that the average amount of money spent by an Indian in a month fell 3.7% to Rs 1,446 during the period from Rs 1,501 in 2011-12. In villages, consumer spending declined by 8.8% in 2017-18, the survey suggested. Though MoSPI has rejected the report calling it faulty and ordered a rework on the survey, according a media report.
Most indicators of economic activity including passenger vehicle sales growth, domestic air passenger growth,broadband subscriber growth and tractor sales growth have all been in the red for several quarters now.
The consumption slowdown has also taken a toll on all the four indicators of the producer economy —Purchasing Managers’ Index (PMI) composite, core infrastructure sector growth, banks’ non-food credit growth, and rail freight traffic growth all taking the blow in the last 2-3 months.
Core sector growth which is an index of eight key industries declined by over 5% in September while non-food credit growth fell to slowest rate in 23 months in September.Non-food credit disbursal by commercial banks was down to 8.3% in October as against 13.4%during the same period in 2018.
Revenues from freight were down by 3.7% in the second quarter of this fiscal.
Country’s power demand declined to a 12-year low in October at 13.2% from a year ago period with industrial states Maharashtra and Gujarat reporting over 22% and over 18% decline in the power demand. The infrastructure output also contracted by 5.2% in September, the worst in 14 years.
Likewise, India’s diesel demand — another indicator of industrial economic activity — fell in October to its steepest annual rate in nearly three years, a media report said quoting a government data. Local sales of diesel, which accounts for about two-fifths of overall fuel consumption, slipped 7.4 per cent year-on-year to 6.51 million tonnes.
The Reserve Bank of India (RBI) has already cut the repo rate by 135 basis points to a nine-year-low of 5.15%, this year, but that has also failed to show any material impact on demand for new loans from the banks.
On the economic situation, the last two quarters have seen a GDP growth of just 5% and 4.5% respectively with fears for further fall, at least for next couple of quarters. The unemployment scenario at 6.1% is at a 45-year high in the country.
The Reserve Bank of India’s (RBI) Consumer Confidence Survey (CCS) done in November reveals a further fall in the consumer confidence. The survey is based on five variables viz. economic situation, employment scenario, price level, income and spending. The respondents were not too happy about the current economic situation and the employment scenario.
In the unorganised sector, the employment scenario – as is being reported in different sections of media – is even worse, with daily wagers not finding work for more than 15 days in a month.
The CCS survey also reveals that people felt the price levels have risen in the last one year and the inflation is only likely to go up. The situation is quite precarious as we are witnessing a demand deficit on the one hand while rising inflation on the other. Inflation spiked sharply to a 16-month high of 4.62% for the October month. The banking regulator has revised the consumer price inflation (CPI) projection upwards to 5.1% for the second half of the FY20 and 4% for first half of FY21.
That could have an adverse impact on consumption, even more.
Despite a corporate tax rate cut, the companies have stayed away from capacity expansion. There is a visible lack of confidence among the businesses because of the prevailing economic situation in the country.
The businesses as well as the working class have not been too keen on taking loans, hitting banks’ credit expansion plans.A Business Today report suggests that the credit expansion has slowed down to demonetisation lows of 6% per cent in the quarter ended 30 September. Private bank loan growth dropped to 14% from 22% a year ago while state-run bank loans growth was down to 5% on year from 8% in the first quarter, the report said.
On the other hand, the non-banking financial companies or NBFCs which provide small and micro loans have also been facing intense credit squeeze as exposure to loans from lenders have taken a hit after IL&FS breakdown. The loan growth for NBFCs fell by 36% year-on-year in September quarter, this report said.
After reporting negative growth, Goods and Services Tax (GST) collections were up by 6% crossing the one trillion rupee mark on the back of higher consumption. But it could be because of a festive season. The government may also increase tax rates on some products to increase its revenues.
But its hands are tight and without a push to government spending the task looks more daunting. How the government will manage its finances and also the overall economy is a question everybody has.