The slowdown is reversible but needs fresh thinking

Last Updated 24 August 2019, 02:30 IST

Writing a month ago, once again I raised the possibility of a generic slowdown: The Survey attributes the slowdown in consumption expenditure mainly to the travails in the Non-Banking Financing Companies (NBFCs) which affected the credit extended for purchasing vehicles, lowering the demand for automobiles. However, anecdotal evidence raises the possibility that the consumption slowdown is broad-based and even affecting the top line of non-durables (the so-called fast-moving consumption goods).

The point is not to blow one’s own trumpet, but merely to demonstrate that this train wreck in slow motion was visible to anyone who cared to look for quite some time. The stock market bubble had concealed the problems in the real economy; yet, at some point the bubble had to burst, revealing the true extent of the problem.

To understand the current issue, one needs to go a decade earlier. Then, the economy was growing and corporate investment was robust. However, much of the investment was based on wildly optimistic assumptions, which were later belied by harsh economic realities. As the risky bets went awry following the global economic crisis, it was inevitable that the economy would not return to the good old days. Some cooling off was inevitable.

However, a modest recovery was underway around 2016. One chart tucked away in the annual report of Hero MotoCorp Ltd., the leading manufacturer of two wheelers, throws some light on what exactly happened. Buoyed by the robust rural demand following a normal monsoon after two deficient years, the sales of two wheelers was growing at a whopping 28 per cent (annualised) till october 2016. However, immediately after demonetisation, sales plunged into negative territory. There was a modest recovery later, but the broken momentum was never regained.

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