Elephant stuck in a swamp: Slowdown in the Indian Economy
Google the term economic slowdown, and you’ll come across a definition which states that an economy is said to be slowing down if the GDP growth rate is reducing. The economy is still growing but at a slower pace. Going by that metric, the Indian Economy is in a state of slowdown at this point.
Now let us try to understand how did we end up here and why we are facing this slowdown. Answering these questions is important, especially for the common people who have been majorly living their lives in the same way as before but are facing the negative impact of this slowdown.
The start of this slowdown, or the first step towards it, came in the form of demonetization. Not just the people but demonetization also gave a rude shock to the MSME(Micro, Small and Medium Scale Enterprises) sector, much of whose transactions were in cash, the cash crunch disrupted their business activity, and before they could recover from this, they were hit by the Goods and Services Tax(GST), India’s biggest indirect tax reform, without a doubt GST was a step in the right direction, but its structure, implementation, and timing remain to be a matter of debate.
A lot of people get confused when they read about the ongoing slowdown but at the same time, they see Sensex touching record high levels. To get some context here, Sensex has been above 40,000 points even though the last quarter has been the worst in many years in terms of GDP growth. So the question that arises is “Why is the market trading so high if there is a slowdown?” and the answer to this is that Sensex is an index representing best 30 of all companies listed on the Bombay Stock Exchange(BSE) and thus, it does not present the complete picture of the Indian market.
To get a better idea of the overall market situation, we should take a look at the other market indices too. If we look at the Nifty Midcap index, which represents midcap companies, we can see the slowdown. The index peaked in January 2018 and since then hasn’t been to achieve that level. In fact, at this point, it’s very low as compared to the peak level it had achieved. The case of the Nifty Smallcap index is also pretty similar.
Thus, this brings us to the conclusion that there is distress in the market, and the real troubled sector is the MSME sector. Now, this is a matter of concern as this is a sector which employs the largest number of people in our country after agriculture. The reforms initiated by the government, the most important one being the corporate tax cut, have helped large-cap companies. According to a report from ‘The Business Standard’, 91% of gains from this reform have been cornered by 13 firms.
The corporate tax cut hasn’t shown a visible impact on the MSME sector, which continues to be in distress.
Now let’s take a look at inflation, inflation has largely been in the desired range in the past few years, and the government must be credited for that. But here, we should also note that this is also because the demand went low, reducing the gap between demand and supply, which is the cause of inflation and thus, inflation has remained under control. Controlled inflation is desirable, but we do not want it to come due to a fall in demand, we want an increase in supply. An increase in supply means a rise in production which creates jobs, thus increasing the purchasing power of the people, which in turn fuels demand which motivates production, thus creating a virtuous and desirable economic cycle.
Taking a look at the agriculture sector, we see that it is in no good condition. This sector has been in distress despite years of government efforts to help out the farmers. The problem in this sector is lately been because of climate change, rainfall in a vague and undesirable pattern has many times resulted in the loss of crops, which makes the conditions of farmers, especially the ones operating on a small scale, worse. Agriculture and allied sectors still employ the largest portion of the Indian workforce, and so problems in this sector are always a matter of concern.
Let’s now analyze the situation of the automobile sector, which has been in the news lately and seems to be one of the worst affected sectors. The distress in this sector isn’t solely because of the ongoing slowdown, but there are some other reasons as well. With the rise of Cab Aggregators like Ola and Uber in Indian cities, people are getting discouraged from buying cars as these cabs offer them comfort, and people also do not have to worry about other expenses that come with owning a car such as maintenance and parking, parking especially is a problem in Indian cities as they are getting more and more congested. Thus, the Finance Minister’s remark that “The automobile industry is now affected by BS6 and the mindsets of millennials, who now prefer to have Ola or Uber rather than committing to buying an automobile” is not completely arbitrary but surely wasn’t a statement you would expect from the FinMin.
Also, at this point, India is building public transport infrastructure at a massive scale, and metro lines are coming up in over a dozen Indian cities; this is also a reason why this sector is and will be affected, as people will have less motivation to buy cars. This would especially affect the 2-wheeler market in the Tier-2 and 3 cities because due to the lack of public transport facilities in these cities, people were under a virtual obligation to own vehicles which were mostly 2-wheelers due to the affordability factor, now that the public transport infrastructure is coming up this obligation will no longer exist.
The sector was also about to undergo a transition in the coming times, the transition from producing petrol/diesel vehicles to electric vehicles, as that is the future of this industry. Because of this, a slight downfall in this sector was expected as this transition or shift would need effort and investment. But now, since the slowdown has worsened the condition of this sector, this transition will be delayed as automobile companies would now give priority to ensuring their survival in the present and then look towards the future. The petroleum sector, which is directly affected by the automobile sector, now gets a few more years of guaranteed demand, as it will enjoy growth as long as petrol/diesel cars are under production. Because of all this, the environment is also getting affected as the replacement of polluting petrol/diesel vehicles with non-polluting electric vehicles has been delayed.
Next, let’s have a look at the banking sector, which was already reeling under the burden of NPAs(Non-performing Assets), the distress in the MSME sector is worsening the situation as higher loan defaults are coming up from this sector, and the fact that MUDRA loans have a higher percentage of defaults now than in the past makes this clear. Government reforms in this sector, a major one being the merger of PSU(Public Sector Undertaking) banks, are yet to show any major positive impact.
The condition of the global economy should also be analyzed to completely understand the cause of this slowdown, as in a globalized world, no country can remain completely unaffected by the state of the world economy. The ongoing US-China trade war has led to an overall slowdown in the world economy, which has certainly contributed to the slowdown in the Indian economy as well.
Here I feel we have missed an opportunity, the opportunity to take advantage of the trade war and get American companies to move their production bases from China to India. Thus, there was an opportunity for us to expand our industrial base. Nevertheless, if this trade war continues, that is going to happen eventually. Both the American and Chinese governments understand that this skirmish is unnecessary. Hence off late, we are seeing efforts from both sides to end this tussle.
The economy needs reforms to help the MSME sector to come out of distress, this will effectively deal with the problem of job loss and thus fuel demand, the effect of which will spread to other sectors and eventually drive the economy out of this slowdown.
As they say, change is the only constant. No set of measures can guarantee growth forever. Economies have to change according to the ever-changing world to keep growing, and after every few years, we see a phase of slowdown which rings bells into the ears of the government to bring change and to reform the system, the measures that the government takes and the reforms that the government brings-in then fuels growth for a few years and then again we see a slowdown, thus forming a cycle of growth and slowdown/recession. This ongoing slowdown is partially caused because of this cycle, but we certainly cannot ignore the mistakes that have been made that now need to be mitigated.
Looking at the history of economic crises in independent India provides us with some much-needed hope, we have come out of conditions much worse in the past. Hence, there is no need to panic, India remains to be one of the best investment destinations in the world. We will come out of this, and we’ll come out stronger.
Lekin suffer lamba hoga, apni kursi ki peti baandh lijiye :)
~ Abhishek Jha.
