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Govt must acknowledge the slowdown

Last Updated 16 September 2019, 02:02 IST

The bad news for India on the economic front is getting worse. The slowdown is getting well-entrenched. Those who fretted over 5% economic growth may be faced with worse news. India’s nominal GDP growth, a real yardstick of economic expansion that does not adjust for inflation, has come down to 8% in the April-June quarter of this fiscal.

Since nominal GDP is calculated at the current market price, it expresses recent changes in the market.

Hence, a lower nominal GDP explains lower credit growth in the system, lower corporate revenues and lower tax collections. At 8%, the nominal GDP is 350 basis points lower than the Union Budget projection of 11.5%. Willy nilly, it is indicating deeper problems in the economy than projected out to be.

Let’s look at a couple of data points released over the past week. The Reserve Bank of India’s data shows bank loans, apart from those given to the Food Corporation of India (FCI) for procurement of food grains, have slowed. The credit growth for the non-food segment has fallen to a 7-quarter low.

Similarly, deposit growth in the banks too has fallen to its worst in over four months. Credit and deposit growth have lost momentum.

The fall in credit growth may be intriguing at a time when the economy is slush with liquidity.

The RBI has infused Rs 3 lakh crore into the system in 2018-19 through buying bonds from the secondary market. This means banks have ample money to lend. But its major borrowers – the non-banking finance companies (NBFCs) have been facing problems since the IL&FS scam last year and that has made lenders wary.

Instead of constantly complaining about problems of liquidity and credit, the government and the RBI need to ensure that the NBFCs are financed adequately. They are lenders to not only home and auto buyers but to housing companies and auto dealers. Auto dealers have complained that they have been getting booking enquiries but in the absence of finance, the sales are not taking off. About 40% of consumer lending in India is done by NBFCs.

On deposits, which have also been coming down, one should exercise caution on blaming it on interest rates. Deposits do not often fall because the banks or post offices are offering lower interest rates. It is because people’s incomes are falling, which leaves lesser money in their hands to save. An RBI research on the dynamics of savings and deposits, suggests that income is the most important determinant of deposit growth. A slowing economy leads to lesser incomes, lesser savings and job cuts.

Decline in manufacturing

Another official data point shows a sharp decline in manufacturing sector expansion. Hidden beneath the seeming rebound in the latest industrial production growth numbers is the investment and consumption related weakness reflected in the tepid growth across the capital goods (-)7.1% and the consumer durables (-)2.7%.

The negative growth has been continuing for months, which is evident in auto sales and other white goods sales numbers.

However, Finance Minister Nirmala Sitharaman on Saturday said inflation is under control and there is a clear sign of revival of industrial production.

She had also suggested a week ago that the usage of Ola and Uber by the youth had brought the auto sector to a halt. Her remarks might give an impression that the government was still in the denial mode about the economic slowdown.

The auto industry witnessed one of its best times between 2011-12 and 2017-18, when Ola and Uber too came into existence but the slowdown in the auto sector is only a year old. Hence, the argument does not hold much water.

Of late, even tourism has started to slump. The latest data suggests the growth in foreign tourist arrivals in the first seven months (January-July) 2019 was the slowest in the past four years. Not only the global economic slowdown but also the government’s policies are to be blamed for this drop. Last year, the centre had almost doubled the e-visa for tourists up to $100 and only last month, as a course correction, it introduced a short duration e-visa with one-month validity at $25.

Then, the foreign trade data, released over the week only reaffirms one’s belief that the world is in a bad shape. At least 22 of 30 major merchandise sectors, witnessed a fall in exports in July. The risk to a global recession is getting more pronounced by the day.

What should the government do to reflate the economy?

First, to realise that there is a problem and then work on it one by one. In India, the problem is home-grown. Indian economy is consumption-based. The share of consumption is about 60% of the GDP but buyers have been cutting back on spending because the future of the economy looks bleak and consumer confidence is low.

Jumping on to the structural reforms on a weak economic edifice may boomerang. For instance, a comprehensive ban on plastics may destroy jobs in the industry, which help sustain lakhs of workers at a time when job losses are rampant.

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(Published 15 September 2019, 14:32 IST)

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