Do we need to be alarmed by the slowdown?

Much is being made of the economic slowdown in India, culminating in the lower GDP rate quoted for the last quarter. But what is the real significance and the real story behind the slowdown? A common sense approach has some answers.....

The noise on economic slow-down in India is not dying. On the contrary, it has become louder after the GDP figure for the first quarter of FY 19-20 was reported. The GDP rate has fallen to 5% as against 5.8% in the preceding quarter.

Many markers

Reports suggest that the manufacturing sector is not growing. The auto sector is amongst the biggest laggards. Consumption is falling and factory inventory is piling up. The construction sector is sluggish, which also happens to be the cause of high unemployment. The poor GDP also reflects the sad state of our mining sector. Our ever growing services sector like IT and software seem to have stopped growing. The agriculture sector is not up to the expectation as it records a growth of only 2% as against 5.1% in the corresponding first quarter of FY19.

Statistically, the real cause of worry is the growth recorded at 0.6% in the manufacturing sector as against 12.1% in the corresponding quarter last year. The government has been criticised by many as the steep fall in GDP has come after many years (in the 25th quarter). Critics have said that India is doing poorly even when compared to smaller countries like Bangladesh, Vietnam, Malaysia and the Philippines. Some foreign media also share this view.

On the other hand, the RBI has reported that the slowdown is cyclical and not structural. Bibek Debroy, Chairman of the Economic Advisory Council of the Prime Minister has stressed that those who seek to spread a message of gloom and doom are doing great disservice. “The EAC-PM does not endorse such views. While constructive criticism and suggestions are welcome, a message of despair and hand-wringing is best avoided”.

Half-empty or half-full?

There are definitely two views of the glass being half empty and half full. There was a slowdown in the first quarter of the year, when the country was in the midst of general elections. During this period, the political situation was unstable and hence there was not enough investment. The other view is that the economy has suffered from the twin blow of demonetisation and bad implementation of GST and now the net impact is surfacing.

In this column, an attempt is being made to evaluate the status of the economy, not from the point of view of an economist in the matrix of economic jargon, but from the common sense point of view.

Wider base

It is an admitted fact that GDP growth rate is an important indicator of the economy, but it is not an absolute measure. Growth rate is measured in comparison with an existing base. Normally, developed countries have a very wide base and hence, despite a booming economy, the growth rate of GDP may be less. For example, the GDP growth rate of the US in 2018 was 3.6%. In our country, we have been doing good the last few years and hence the base was widening and consequently it will have a base-effect, when measuring the growth rate.

There is no doubt that we have not done well in the first quarter of FY19-20, but that does not mean that our economy is in a sad state and that there is a reason for panic. There is no denying the fact that we have to push more for better acceleration of the economy as we aspire to become a powerful economy. The issue today should be to look for causes of deceleration and take corrective action to reach both short term and long term goals.

Capital strangle

The status of the country’s economy depends upon the status of business in the country which is normally in the hands of the private sector. The government and the public sector in a normal situation should not be doing any business. In our country, we have some big loss-making public sector companies, which instead of creating wealth for the country, are guzzling the tax income of the country. Anyway, it is the private sector which is mainly seized with the business, and today, unfortunately it is not investing fresh capital. Neither are big factories being set up nor are the existing ones enlarged. One major reason is the problem circling ‘capital’ which has its genesis in the legacy of NPA (non-performing assets) of public sector banks. Banks have become more cautious in sanctioning fresh loans as many bankers fear punitive action by the enforcement agencies of the government. RBI has added a problem by not lowering the lending rate, despite falling inflation, as the RBI was worried that inflation would go up.

Meanwhile, everything was not in a sorry state as NBFCs (Non-Banking Finance Companies) were bearing the burden of the lack of capital and helping business. But, with the very sad implosion of IL&FS, even this sector, NBFC, was very badly hit. Even some mutual funds which had been invested in some NBFCs debt funds were badly hit. This erupted in a cascading effect to strangle ‘capital’ for financing business. The net result was that industries started getting suffocated. One serious side-effect of our banking problem was to divert a big chunk of the tax payer’s money for recapitalisation of banks. This was an uncalled for and non-planned expenditure to save our banks, and it harmed our economy.

Demand and a good market are strong parameters for a growing business. We are a country with a 130 crore population and thus we have a huge captive market. Our industry has so far been blessed with this natural advantage. Now, it is being heard that the growth in private consumption has fallen to roughly 3% as against the earlier figure of 10%. There are some sectors which are now complaining that there is shrinking demand and hence they are getting constrained and have had to cut their business. Economists say that there is decreasing money in the hands of the people and hence there is decreasing demand. The conclusion about less money in the hands of the people today appears to be exaggerated.

Govt pumping money

There are various schemes of the government through which money is being paid directly to the weaker sections and farmers. Under the PM Kisan Samman Nidhi alone, more than Rs.80,000 crores are being disbursed this year, where each farmer gets Rs.6000 per year in three installments. Even MSP (Maximum Support Price) has been increased for a large number of crops thus giving higher income to farmers. There have been increments in salary and pension, thus injecting more money into the society. Yes, some loss of money cannot be ruled out due to drought and floods in some areas of the country, but this exception cannot become the rule.

There is an urgent need for reforms in the judicial system. Many of our good companies get locked in very long litigations, which hamper their production and sometimes even their factories have to be closed. Nowadays, activists file PILs on insignificant issues and then litigation goes on for a long time

Changing demand

Some slowing down in demand can be linked to behavioral changes of consumers and also due to the changing loyalty to brands. Many youngsters today prefer to use Ola and Uber cabs instead of purchasing their own vehicles as they find it more convenient and also economically more viable. To these youngsters, purchasing cars is no longer a status symbol. This may be one of the reasons for lesser demand in the auto sector. Slowing of demand of the ever popular Parle biscuits has been reported but this can be due to change in brand loyalty and also availability of cheaper and better unbranded biscuits. The biggest problem with our business sector is that the export market is not properly pursued. Domestic demand will stagnate at some point of time and to have a steady growth, the export market needs to be explored and depended upon.

Together with the importance of a capital and demand-based market, the other important segment for growth in business is the quality of the workforce. We have to admit that though every year we are bringing 12 million youngsters into the job market, unfortunately most of them are not put to proper use. There is an absence of value education, research and imparting of skill. In such a situation, the needs of the industry to have a capable workforce suffers. Industry cannot grow without innovation and for that the country needs to be supplied a well-equipped and employable workforce. Today, none of our universities are in the list of first 300 of the world universities. This year in the world ranking, some of the good institutions slipped down further.

Industrial data for July shows some improvement in IIP and manufacturing output figures. The slowdown in the economy is going to change in the coming months. Even the GDP growth figure in the coming quarters will slowly improve and hopefully by the year end we will again achieve the position of the world’s fastest growing major economy. But we must improve in some areas for lasting acceleration in the economy.

First, we have to correct our labour laws. It is a tough job as there can be some resistance from labour unions. We have done some good work in the area of easing business but without reforming our labour-related laws, we cannot move further.

Second, land acquisition laws have to be amended. Today, industry cannot get cheap land to set up new factories. Industry is never a charitable organisation and it will not diversify unless there is some profit. The government has to give all facilities at a competitive rate to the industry. There have been media reports that many of the billionaires are leaving the country or investing outside. Our wealth creators have to be respected.

Long litigation

Third, there is an urgent need for reforms in the judicial system. Many of our good companies get locked in very long litigations, which hamper their production and sometimes even their factories have to be closed.

Now a days, activists file PILs on insignificant issues and then litigation goes on for a long time. Our country is very proud of a very fair and impartial judicial system but we have to ensure that the time taken is curtailed. The country needs sustained development giving equal importance to both environment and development. There are some pending litigations on environment issues which have resulted in the stoppage of production in the core areas. Even the IMF has recently commented that economic growth in India is slowing down due to environmental issues. Fourth, our tax laws have to be simplified and they should not seem draconian. We as a nation have to work hard and work honestly to make India a better economic power. We should pay our taxes honestly. We should not apply our intelligence to evade tax and lock the country’s wealth in tax haven off-shore companies. We should speak good about our country so as to attract investors from abroad.