Why Narendra Modi Government must acknowledge the economic slowdown, now
Over the past few weeks, Finance Minister Nirmala Sitharaman announced several measures to tackle economic slowdown. These steps have come after India's GDP growth in the first quarter of FY20 slowed to 5 per cent--the lowest in 25 quarters or in six years.
However, key Indian sectors are facing a slowdown that seems far more than a cyclical occurrence, said many economists including former Indian prime minister Manmohan Singh, who is also one of India's most prominent economists.
Singh said on Sunday in a video address that it is necessary for the government to reach out to all "sane voices" to steer the economy out of this crisis. Commenting on Singh's statement, Nirmala Sitharaman said, "I have no thoughts on what he said. He said it and I listened to it." The government and finance minister Sitharaman--even though there are enough alarming signs on growth slowdown--are yet to admit that the Indian economy is going through an upsetting period. At a press conference on August 30, a reporter asked Sitharaman to explain how the finance ministry plans to tackle the multi-sector crisis, especially the automobile sector. There was no clear response. On September 1, at another press conference in Chennai, the finance minister's reply was no different. When reporters asked whether there is an economic slowdown, the finance minister said the government is holding consultations with ailing sectors and refused to admit that the country is going through an economic crisis.
SLOWDOWN COULD GET WORSE: Well, it could be too late for the government to even admit that India is suffering the worst economic slowdown in a decade--the coordinates of a slowing economy have become so prominent that even laymen, with little knowledge of economic jargons, have started identifying the crisis as job losses continue to mount across most sectors.
Let's begin by disseminating official data that has painted a grim picture over the past few weeks:
1) India's GDP growth has touched 5 per cent to a six-year low in the April-June quarter. The alarm bells were ringing prominently when growth had slowed to 5.8 per cent in the previous quarter, but a carnival of political issues overshadowed economic slowdown. While in nominal terms, India's gross domestic product (GDP) grew by 7.99 per cent, which is the lowest since December 2002.
2) Almost all Indian sectors including auto, manufacturing, agriculture, FMCG, real estate and construction have slumped badly, and official data released by the National Statistics Office (NSO) confirm that. Weaker consumer demand and slowing private investments are the two key factors behind the ordeal of core Indian sectors, many of which have openly come out openly with S.O.S signals. Meanwhile, eight core sectors have registered negative growth of just 2.1 per cent in July, compared to 7.3 per cent in the corresponding month a year ago. All of these indicators also explain the reason behind the recent jump in job losses. According to the Centre for Monitoring Indian Economy (CMIE), overall unemployment in India has now touched 8.2 per cent, with the urban figure as high as 9.4 per cent.
3) Indian investors have also become wary of the slowing economic growth as major companies, especially from the auto sector, have been posting huge dips in profits and even losses in many cases. Not just domestic investors but foreign investors are also constantly pulling out capital from the Indian market. FPIs have pulled out a net amount of Rs 5,920 crore in August even after the government announced a rollback of enhanced surcharge on FPIs.
4) All major Indian companies--from biscuit to vehicle manufacturers--have seen their fortunes dip over the last few quarters, forcing them to eventually call out for help from the government. It would be safe to say that the lending crunch in the market has deeply impacted almost all sectors that play a leading role in driving the Indian economy.
5) Meanwhile, the Indian rupee has again become one of the worst-performing Asian currencies after depreciating 3.65 per cent against the dollar in August. This, too, is the steepest decline in the Indian currency in the last six years. The value of the rupee has hit Rs 71.98 against the dollar at present. According to global brokerage firm Nomura, weakness of the rupee is a reflection of the underperformance of high-yielding emerging markets foreign exchange, weakness in equities and recent policy actions.
These are just a few points that represent the situation of the Indian economy at the moment. It could become much worse if pragmatic steps are not taken quickly to mitigate the effects of a looming global economic crisis. The economic crisis may hit prominent economies around the world starting with the US as early as 2020, according to a survey of top US economists conducted by the National Association for Business Economics (NABE).
LIVING IN DENIAL: Even as top economists and brokerage firms in the country have been urging the government to focus on boosting investments to drive growth, the government has shown little intent. A tweet from BJP's official handle from August 26 said India still remains the fastest-growing economy. It's surprising considering the fact that India had already lost its fastest-growing economy tag to China in the previous quarter.
In fact, China recorded GDP growth of 6.2 per cent in the April-June quarter, way above India's 5 per cent. India's growth trajectory has also been slashed by many financial services company Moody's, Goldman Sachs, Citigroup and the World Bank as well. However, the government or the finance ministry, in recent statements, indicated that they are still hoping for India to become a $5 trillion economy by 2024--a feat that requires India to grow at 9 per cent, according to global financial services firm EY.
$5 TRILLION PIPEDREAM?: According to the latest edition of EY's Economic Watch, India will have to grow at 9 per cent in each of the five subsequent years to become a USD five trillion economy--USD 3.3 trillion in FY21, USD 3.6 trillion in FY22, USD 4.1 trillion in FY22, USD 4.5 trillion FY24 and USD 5 trillion in FY25. For this to happen, a massive flow of investment is required in the sectors that have collapsed after the lending crunch crippled many businesses since the second half of 2018. Financial research firm India Ratings and Research has clearly stated that the government has " little room" to provide a significant stimulus to the slowing economy. It also said that India is currently facing a mix of cyclical and structural slowdown. While higher investments can heal the ailing economy, the government practically has no room to push investments.
MEGA MERGER OF BANKS: A few days ago, the finance minister announced a merger of 10 banks--six public sector banks with four better-performing anchor banks. India will now have just 12 PSBs instead of 27. The megabank wedding announced by the Narendra Modi government was termed as the "building block" that will help India become a USD five trillion economy by 2024. But many economists share an opposing view. While reducing the number of PSBs may lead to a better outcome in the long run, it is more likely to complicate proceedings for India in the near term. Many analysts have highlighted that the process of aligning banks would take at least two to three years. Standardising core technologies, linking customer interface applications, mobile apps, and websites would take at least 24-36 months. While the banks were given an upfront capital of Rs 55,250 crore or $7.7 billion, it may not be enough as the combined non-performing assets (NPA), or bad loans, of nine banks out of the ten to be merged are over 5 per cent.
Meanwhile, Sitharaman herself announced that the gross non-performing assets in the banking sector have come down to Rs 7.90 lakh crore from the earlier Rs 8.65 crore in December. Another way to look at it: Only a few thousand crores worth NPAs have been reduced from the huge pile. Many economists, though in favour of reducing the number of PSBs, have expressed concern over the timing of the move, which they say comes when the government should be focused on increasing bank lending and recovering NPAs.
ECONOMISTS CONCERNED OVER 5% GROWTH: After the fresh GDP numbers were released, several economists have expressed shock as five per cent growth is way lower than what they had predicted. Madhavi Arora, lead economist at Edelweiss Securities, said the growth in the first quarter of FY20 is a "clear shocker" and confirmed that the growth slowdown will stay for a prolonged period.
"The 1QFY20 GDP print at 5 per cent (Edelweiss: 5.6 per cent) is clearly a shocker, and confirms that the growth slowdown is more entrenched, thus giving further scope for coordinated fiscal and monetary response," she told news agency Reuters.
"The growth slump clearly reflects that the slowdown is beyond just the cyclical aspects and policymakers need to address the structural constraints to ensure secular growth picks up ahead," she added. Kunal Kundu, India economist, Société Générale, said the GDP figures caught him by surprise. He, too, said that the government should focus on finding ways to provide fiscal stimulus. "For immediate impact, some sort of stimulus is required for sure," he said. ICICI Securities Economist Anagha Deodhar said the actual GDP number is sharply below expectations and added that stimulus measures announced by the government are "inadequate" to boost growth.
"The stimulus measures they (government) announced last week are inadequate to boost growth. Today, they announced merging of PSBs (public sector banks). Although PSB capitalisation is positive to some extent, the measures are too little too late," he said.
ACKNOWLEDGE, ADAPT, AND OVERCOME: At a time when financial indicators are ringing a loud alarm bell, the government's primary goal should be setting the basics right instead of going ahead with a "band-aid" patchwork.
For starters, it should first acknowledge that the country is facing an economic slowdown and consult economic experts, some of whom have been urging the government to focus on boosting investments, which could help in reviving consumer demand and increase the output of key sectors.
Despite making bold with reform measures like GST, the Modi years may be remembered for the economic slowdown, the shocks of demonetisation, the agrarian distress and the big job scare. Two of the government's most famed economic reforms--demonetisation and GST implementation--have been identified as major factors behind the slump in growth in many reports and surveys. Medium and Small Scale Enterprises (MSMEs), the backbone of multiple Indian sectors, are still suffering from the combined consequences of both the reforms.
Battling the economic slowdown may require a slew of complex steps over the next few months, but the first and the most difficult step for the government is to acknowledge the slowdown. After all, as they say, the first step in fixing a problem is recognising that you have a problem.