The centre of the government’s policy in dealing with the economic slowdown has been to offer sops to the supply side when nearly every economist is convinced that the problem stems from low demand. Most economists also agree that the slowdown started with Demonetisation in 2016.
Quarter One growth in the current fiscal year has slumped to five per cent. Growth of eight core industries dropped to 2.1 per cent in July, 2019 though the sectors — coal, crude oil, natural gas, refinery products, fertiliser, steel, cement and electricity — had grown by 7.3 per cent in July, 2018.
Unemployment has risen to a 45-year-old high. High bank NPA’s and the debt crisis in the non-banking financial companies (NBFCs) has cast a cloud on the investment climate. And to make matters worse, consumption has slowed down, dealing a body blow to labour intensive sectors like automobiles and real estate. FMCG companies are struggling to find takers for even Rs 5 biscuit packs in rural India which has been hit by low farm income growth for over five years now. Parle-G is facing 7 to 8 per cent de-growth in consumption volumes of its products, with more than half of its sales coming from rural India.
While India’s macroeconomic indicators show that everyone needs to brace himself for an unknowable period of slowdown, the imminent festival season — the period spanning the months of September, October and November — will be critical in understanding the depth and sectoral nuances of the weakness. For sectors such as automobile and consumer durables, these three months account for 25 to 35 per cent of their annual sales. That is why these three months are crucial.
However, even a sharp demand uptick in the festival season may not be enough to offset the slowdown as former Prime Minister Manmohan Singh has outlined. For, the macroeconomic indicators do not validate the sustainability of this demand. Singh estimates that it will take a few years to get out of the “very worrying” economic slowdown, provided Prime Minister Narendra Modi and the government comes out of “their habit of headline management” and acts sensibly now.
“I believe that we are entering a different kind of crisis now, a prolonged economic slowdown that is both structural and cyclical,” Singh told Hindu Business Line, adding that the crisis was triggered by a liquidity crunch.
He gave a few tips to the government as to what needs to be done. They are:
1) Radically simplify and rationalise the GST regime, even if it means a loss of revenue in the short term
2) Find innovative ways to kickstart rural consumption and revive agriculture, say by putting money back in the hands of the people through targeted transfers, and unshackling agricultural markets
3) Tackle the lack of credit for capital creation, de-choking the public sector banks as well as NBFCs
4) Revive key job-intensive sectors like textiles, auto, electronics and affordable housing, along with assured priority lending, especially for MSMEs
5) Find ways to address export markets that have opened up as a result of the trade wars between the United States and China
6) Establish a credible roadmap for massive public infrastructure development, including through private investment.