Economy Slow Down

Prof. S. Thilak, Assistant Professor, SIMS

India has seen an economy slowdown in 2019, with the country’s real estate, automobile, construction sectors and overall consumption demand facing a serious and continuous decay. The second quarter (July-September) of the current financial year (April 2019-March 2020) witnessed a severe decrease in gross domestic product (GDP) growth rate to 4.5 percent, even as international bodies like the International Monetary Fund (IMF) and the World Bank repeatedly cut Indian economy’s growth rates. This was described as the lowest GDP growth rate in the previous 26 quarters, which means in over six years.

The main reasons credited to the fall in the GDP growth rate were – thin manufacturing activity, weakened funds, and narrowed consumption demand. Growth is slowing significantly and there is currently little fiscal space available to the government to spend more. Corporate and household debt is rising and there is deep distress in parts of the financial sector and unemployment seems to be growing. Repeated government suggestions to the 5 trillion U.S. dollars economy by 2024, which would necessitate steady real growth of at least 8-9 percent per year starting now, seem ‘increasingly unrealistic’.  The much-lauded economist and thinker also called for reforms in land purchase, labour laws, stable tax and regulatory rule, fast track bankruptcy resolution of developers in default, proper pricing of electricity, preserving competition in telecom sector and giving farmers access to inputs and finance.

The Indian government’s moves during the past quarter failed to revive the lethargic economy, even as the business emotions remained at one of the lowest. The automotive sector faced its worst segment, and the same was experienced in the real estate and manufacturing sectors. Finance Minister Nirmala Sitharaman announced over 30 steps in various sectors to reverse the downturn, but none of them seemed to have worked, even as it is feared that the decline might soon reach the 3.5 percent-mark. Considering the constant slowdown in the Indian economy, the International Monetary Fund (IMF) advised the Indian Government earlier this week to avoid a fiscal incentive to boost the drooping economy and instead go for an easier monetary policy.

Fiscal stimulus should be avoided given fiscal space is at risk and revenue losses from the recent corporate income tax rate cut should be off-set. It, however, stuck to its overall growth projection of 6.1 percent for the country during the financial year 2019-20. The IMF report also suggested that personal income tax collections could be increased by ending exemptions, reducing the minimum threshold for taxpayers and by raising contributions by top earners. The country’s real estate sector witnessed one of the poorest years, faced with a poor housing demand. As on date, according to rough estimates, there is an unsold inventory of around 450,000 housing units. There has been a strong push by the central government for the affordable housing, which accounts for nearly half of the total residential housing sales. Vice-President of India Venkaiah Naidu expressed hope for revival of the economy in near future and he expressed confidence that the Indian economy would rebound in the near future describing the current slowdown as “cyclical”.

Admitting that the Indian economy was facing “some challenges” due to the down fall in growth this fiscal year, the country had faced similar falls in the past but had “bounced back with a higher growth rate every time.” Data published by the government this week showed retail inflation in June at 6.09% — above the upper end of the Reserve Bank of India’s 2%-6% target band. In the same statement, the statistics office assigned data for April and May that showed consumer-price growth was well above 6%. With lockdowns, the fixed basket on which inflation is calculated is totally irrelevant as many of those typical items, particularly services, are no longer available or have a disappearing product problem. The share of products within the services category with missing prices in the headline index was 22.4% in April as imputed by the statistics office.

Hence extrapolating price trends of the overall CPI baskets which were largely determined by food and fuel sub-groups to the key core components such as clothing, footwear, etc. The central bank’s prefer core inflation measure, excluding transport and communication inflation, yields an underlying inflation rate of 4.4% year-on-year in June. Excluding gold, the rate falls further to 3.5% in June from 3.8% in May, 3.7% in April.