Vijay Kumar Gaba: economic slowdown

Showing posts with label economic slowdown. Show all posts

Tuesday, November 19, 2019

Economic revival needs a coordinated effort att levels

Notes from my Diary

The first and often most crucial stage of finding solution to a problem is usually the "acceptance" that there is a problem. Till very recently the government and its various organs appeared mostly in denial steadfastly refusing to accept that—

(a) the country is facing a economic slowdown;

(b) the slowdown is structural in part and may not correct on its own without intensive policy intervention;

(c) the slowdown is wide enough to impact the most sectors of the economy and deep enough to impact almost sections of the society;

(d) the slowdown is caused by both domestic and global factors and may need comprehensive coordinated efforts at fiscal, monetary, trade, geo political and strategic policy levels; and

(e) the fastest rate growth is not fast enough for an economy having the largest number of unemployed, under employed, and employed in disguise youth in the world.

It should be a matter of some comfort that the realization has begun to dawn upon the government that the economy is slithering down. The finance minister recently admitted that “It would be too presumptive of me to say it (the economic slowdown) has bottomed out.”

As reported by news agencies, "Sitharaman said it’s a bit too soon to say whether Asia’s third-largest economy would be able to stick to its fiscal deficit targets. However, the government’s asset sales program -- key to plugging a gaping hole in the budget -- is moving ahead comfortably, she said.

The RBI governor has also made similar statements in past couple of weeks.

However, there are still many organs of the government which are refusing to accept the problem. For example consider the following:

Recently a union minister dismissed a suggestion of slowdown citing the crowd of people at railway stations and shopping malls.
The bureaucracy has not been adequately sensitized about the urgent need for economic revival. They have rendered many of the measures taken by the government to arrest the economic slowdown less effective. For example, the riders and exclusions added in the proposals to restructure the corporate tax rates and launch a rescue fund for the beleaguered real estate sector have rendered these measures much less effective.
There seems to be no direction to the enforcement agencies to not initiate coercive action against businesses merely on the basis of suspicion of wrong doing; and to the judicial officers of the government for not protracting the litigations unnecessarily.
We have not heard chief ministers of most populated states like UP, MP, Bihar, and West Bengal etc. admitting the economic distress in their respective states.
The public sector bankers and officers have not been assured of full immunity for any action taken, loan sanctioned, investment made in good faith and within the set parameters.

Unless, all the organs of the central government and various state governments arrive at a consensus and initiate a coordinated policy response, it may be difficult to find a sustainable solution to the current episode of economic slowdown.

Interestingly, many brokerages have already seen the light at the end of the tunnel. The next six months are going to be interesting for sure.

Wednesday, November 13, 2019

Slowdown deepening and widening

In the month of September, India’s industrial output contracted the most in nearly eight years with weakness seen across most key segments. Of the 23 sub-sectors within manufacturing, 17 recorded year-on-year contractions.

The Index of Industrial Production contracted by 4.3% in September 2019 over last year compared to a contraction of 1.1% in August. The contraction is much higher than the generally expected number of 2 to 3% contraction. For records, this fall in industrial output is the deepest since October 2011. As of now, the first half of the current fiscal has recorded an average growth of 1.3% in the industrial production.

The capital goods segment, that reflects the growth in investment activity, contracted 20% in September after a 21% fall in August.

The consumer durable production contracted for the fourth straight month in September. The worst, consumer non-durable category also recorded its first contraction in FY20 during the month of September.

The data has led to a spate of estimate downgrades of GDP growth estimates. The consensus now appears veering towards 5% GDP growth in FY20 vs previously estimated 6.5%. The lead indicators are pointing that despite festival season, the growth in the month of October has also remained poor. The consensus for FY21 GDP growth now appears close to 6%.

More notably, in some quarters the slowdown is being acknowledged as "structural" and no longer "cyclical". As per Devendra Kumar Pant, chief economist at India Ratings & Research "The economy is presently facing a structural growth slowdown originating from declining household savings rate, and low agricultural growth. Low agricultural growth is feeding into low agricultural and non-agricultural wage growth in rural areas, which is impacting rural demand adversely."

In the meantime two events worth taking a note have taken place:

Dr Manmohan Singh, former PM has been again appointed as member of the Parliamentary standing committee on finance. He replaces the Congress party representative Digvijay Singh.

As per media reports, the Chief Statistician of India Pravin Srivastava has hinted that a decision to bring the base year for calculation of real GDP growth forward to 2017-18 from the present 2011-12 may be taken soon. This change in base may bring the real FY19 GDP growth number closer to 8% against the present 5%.

Tuesday, November 5, 2019

Keep the wheels of economy in motion

In one of his recent interview, Brian Coulton, the Chief Economist at Fitch Ratings, emphasized that the persisting credit squeeze in the Indian economy may hurt the economic growth much more than the present estimates. Brian cautioned that the GDP growth in FY20 could slip to 5.5%, much below the current RBI and government estimates of 6%+ growth.

For records, the Indian economy grew at the rate of 5% in the first quarter (April to June 2019) of the current fiscal year, the slowest in more than 6 years. The slowdown was visible in all sectors of the economy including agriculture, manufacturing and services. Within services, the growth in finance, insurance and real estate sectors was cited as particularly worrisome, as it highlighted poor credit conditions.

Besides, the credit availability, the high cost of credit is cited as one of the constricted factors. Despite 135bps cut in policy rates in the year 2019, the real rates are found to be still elevated, constraining the growth.

The GST collections for the month of September have reported at Rs 95,380cr a year-on-year decline of 5 percent and 3 percent lower than the monthly average of Rs 98,114 crore for FY19. The GST collections in FY20 have been consistently below the budget estimates. Juxtaposed to the shortfall in income tax collection, it does not augur well for the fiscal balance. The scope for the fiscal stimulus as widely anticipated by the market participants appears very limited. In fact, the government may actually be forced to increase the effective taxation for the affluent section of the society in the forthcoming budget.

Reportedly, housing sales declined 9.5 percent during July-September period across nine major cities to 52,855 units on low demand as economic slowdown and liquidity crisis weighed on buyer sentiment. As per the PropEquity data quoted by Bloomberg, Chennai saw the maximum fall of 25 percent in housing sales at 3,060 units during July-September 2019 as against 4,080 units in the year-ago period. Housing sales dropped 22 per cent in Mumbai to 5,063 units from 6,491 units, followed by Hyderabad that saw 16 per cent decline to 4,257 units from 5,067 units.

Notwithstanding some encouraging sound bites from the corporate leaders this Diwali, the recently released data on core sector growth belies the optimism. The growth in India’s core sector output contracted 5.2% in September 2019, its worst performance since 2005. All sectors in the core index, with the exception of fertilisers, posted a contraction. The data indicates the economy may have slipped further in the 2QFY20, confirming the fear of rating agencies and economists. As per some estimates the GDP growth rate for 2QFY20 could be closer to 4% rather than 6% as widely anticipated.

Two short points I would like to make here are as follows:

The growth slowdown is real, persistent and widespread. A part of this is certainly cyclical, but treating the entire thing as such may be misleading. The structural part of the downward shift in growth curve needs to be acknowledged, identified and treated separately.
The adhoc stimulus must be directed at boosting both consumption as well as investment demand. The measures like corporate tax rate restructuring, and ease of doing business shall have impact only in due course; and for these measure to have any impact the wheels of the economy must be kept in motion.