A common discussion now days in all the forums, be it social gathering, political or TV debate, is the slowdown of the Indian Economy. Although all such discussions have their own opinions but the projection being done is appears very high. No doubt, Indian economy is passing through a difficult stage which needs very careful assessment and quick remedial measures by the Government. The seriousness of the matter can be understood from the fact that in Q 2 this year (TY) GDP grew by 4.5% which is the slowest during the last 6 years. In Q1 the growth was 5% which too was a warning signal. The growth last year (LY) was 5% and 7% in Q1 and Q2 respectively. During first half of the current fiscal the growth is 4.8% as compared to 7.5% last year. There is decline in growth of 6 out of 8 core sectors which is a major area of concern. The other data released by NSO also support the gradual slowness of the economy.
· The gross value added (GVA) growth in the manufacturing sector contracted by 1% in the second quarter of this fiscal from 6.9% expansion a year ago.
· Farm sector GVA growth remained subdued at 2.1%, as compared to 4.9% in the corresponding period of the previous fiscal which is very sensitive from the rural employment point of view.
· Construction sector GVA growth also declined to 3.3% from 8.5% earlier.
· Mining sector growth was recorded at 0.1% as against 2.2% contraction LY. Electricity, gas, water supply and other utility services growth slowed to 3.6% from 8.7% LY.
· Trade, Hotel, Transport, communication and services related growth has also down to 4.8% in the second quarter from 6.9% corresponding period LY.
· Financial, real estate and professional services growth slowed to 5.8% in the Q2 TY from 7% LY.
· However, public administration, defence and other services recorded improvement at 11.6% rise in Q1 TY over 8.6% LY.
The major factors
It may be easily analyzed that slowdown in the Indian economy is not because of a single factor but a number of factors and their cyclic effect mentioned below
- · slowdown in private consumption,
- · decline in investment and export
- · decline in majority of core sectors
- · Inadequate credit offtake owing
- · Subdued demand in the market.
- · Shyness in fresh investment
In addition to above, there are many other factors also. A few industrial and political circles suggest that there is fear psychosis or trust deficit in the industry / trade circles owing to various actions of authorities (IT, ED and CBI) on black money and corruption cases. But the fact remains can be ignore or dilute the control over corruption and black money. The answer is no. No country in world can make long term sustainable economy by tolerating or ignoring expansion of black money and corruption.
It may be born in mind that that there is no country in the world which has not encountered such economic problems in the past. The countries like India which has high internal consumption rate are for more stable than the countries dependent on export and other things. The current slowdown is the result of so many factors, for a few known factors the impact should have been pre-assessed and planned by the Government through a proper road map. These are - Demonetization and implementation of GST.
The impact of Demonetization
While demonetization curbed the black money circulation, but it was bound to severely impact the sectors like real estate where black and white was the rule of the game for so many years. For short term it appears very painful but demonetization will help the real sector with slow but steady growth for a long period. This sector has already discounted bubble effect and prices are either down or not increasing as before. The introduction of Rs2000 currency note is still beyond the understanding of ordinary prudent person which has now started neutralizing the benefits of the demonetization. Many builders has started cash and cheque i.e. black and white. The Govt. needs to plan for systematic withdrawal of Rs2000 currency notes from the circulation without giving inconvenience to general public. It can be done without much disturbances by stopping printing, and Banks should be instructed to accept it but not to re-issue. Within a period of 6 – 7 months, this currency can be withdrawn from the circulation. Currency notes up to Rs 500 are reasonable for Indian economy which will continue to curb the cash transactions and in turn circulation of black money.
The Impact of GST
The GST is one of the most awaited innovative projects rolled out in India which will benefit Indian Economy in years to come. However, the roll out was very painful on both IT Portal and operational fronts. The IT Infra (Portal) was not stable and capable of taking load, which was giving serious problems relating to login, data keying and submission. The application was facing frequent down and slowness. The instructions were not clear and kept on changing for months. The worst of all was very high slabs for most categories and by the time rates were rationalized by the then FM, damage was done. The Govt. should have started from lower slab and the should have done on gradual incremental basis.
The performance of Auto Sector
The most discussed sector for slowdown is auto sector. There are visible symptoms of slow down in this sector as evidenced from the declining trends in sales of Auto Industry most Industry majors but there are several factors which include affordable and convenient CAB system. There are growing problems of parking, traffic load on the road and many times even value of toll tax. With all these issues, those who own the cars, think many times to use their cars instead they use Cab. Thanks to user friendly IT platform which make the cab availability possible at the door step without any negotiation of rate or problem in payments. Many people start using Cabs with free ride and then develop habits. Pooled cab system again made it affordable. Thanks to initiatives like “odd and even” people in big cities are being discouraged for use of personal cars. The most important people are waiting for BS VI which to be effective from 1st April 2020. It happens every time when such upgrade happens. The question is why car manufacturer was waiting till the last moment? The upgraded model (BS IV) could have been made available much before the date fixed by the Govt. to avoid avoidance of the old version by the people. There is no slowness in two-wheeler segment because of rural penetration.
The Government Response to Problem
With a view to giving quick fix, the Govt. has initiated several measures to address the problems, a few mentioned below
· Slashed the corporate tax rate to 22 per cent from 30 per cent for existing companies, and to 15 per cent from 25 per cent for new manufacturing companies.
· The government has initiated changes in IBC where now NBFCs with Rs 500 Cr assts may be referred to Insolvency Resolution bringing the finance companies under the ambit of insolvency. Dewan Housing Finance Corporation (DHFL) is already in National Company Law Tribunal (NCLT). This came against the backdrop of the ongoing liquidity crisis in the non-banking financial companies (NBFCs) that has also sparked concerns about the overall stability of the financial sector.
· Under the NBFC liquidity injection response of the government, public sector banks have been sanctioned to purchase Rs 21,580 crores of pooled assets. The National Housing Bank has also extended Rs 30,000 crore worth of credit lines to NBFCs.
· Housing sector received maximum attention like NBFCs during these six months. The Centre had announced a Rs 25,000 crore stimulus package for the ailing real estate sector earlier this month.
· The Govt. has announced to give impetus to revive over 1,600 stalled housing projects covering 4.58 lakh units. This will also generate considerable employment, revive demand of cement, iron and steel industries and relieve stress in other major sectors of the economy.
· The mega merger of 10 PSU banks have been moving on with various approvals to start new structures as on April 1, 2020. The Govt. however is to ensure that these banks should not remain in the backdrop on account of merger.
· The PSU Banks have also been capitalized with Rs70000 crore to boost the lending capacity.
· The government plan to disinvest BPCL, Concor and SCI along with the decision to pare stakes below 51 per cent without losing PSU characteristics.
· The Govt. spending has increased during Q2.
· Permission of 26% FDI in digital media and
· 100% FDI in contact manufacturing.
· RBI and Govt are on the same page for improvements in economy.
The Credit Growth and Banking Industry
In spite of number of incentives and initiatives of the Government, credit growth is not picking up. The reason could be, either banks are not working seriously or working under “fear to fail pressure” and not taking decisions to avoid any subsequent action. The branch staff of most PSU Banks, now a days are more focused on cross selling, cash incentive activities and routine work. One of very important problems of the Banking Industry is that the salary revision of Banks Employees is pending for more than 2 years and currently they are highly demotivated. Unfortunately, Government who appears employee friendly most of the times, is silent spectator to this problem. In addition to resolving salary and pension issue as early as possible, the government needs to strengthen bankers’ credit and consultative committee meetings from block, districts, state to national level and monitor the credit growth on monthly basis. The use of technology will leverage preparation of branch wise dossier for credit requirements of the service area and consolidation thereof at block, district and state level. The credit estimates may be validated and supported by block and district level functionaries on realistic basis and progress of disbursement should be monitored fortnightly. There is no doubt that there is shortage of credit. These measures will not only fill the credit gap but also create job uniformly across the country.
The goal of $5 Trillion Economy
With the current slowdown the ambitious target of $5 trillion economy has come under heavy scrutiny especially after the dismal growth in the first half of the current fiscal. Former Reserve Bank of India (RBI) Governor C Rangarajan has said the $5-trillion target simply out of question by 2025 at the current growth rate which is obvious. However, in my opinion he himself dented the Indian Economy a lot by not allowing interest reduction. The fact remains with the current growth rate, 9 more years would require achieving $5 trillion goal. With the current growth rate India has slipped from number 1 position to 5 in emerging economies after Vietnam, China, Egypt and Indonesia.
The most analyst and economist are on the same page that declining demand is among the most important reasons for economic slowdown, which if not tackled may lead to rescission. The purchasing power of people needs to be increased.
What is the way forward?
· Reduction in individual tax rates (Income tax) in order to increase individuals’ liquidity. It will be an innovative idea if the govt. links the income tax exemption limit with some index of inflation, so that every year, there is automatic enhancement of limits in transparent manner without eagerly waiting for Union Budget.
· Rationalization of GST and quick refund process.
· Ensuring adequate credit growth.
· Govt. should spend more on Infra projects and other capacity building.
· The market has strong fundamentals and Govt. need to boost the morale of economy.
· Intervening in aviation Industry to avoid cut throat competition / price war resulting into failures of airlines.
· Scrap policy for Auto sector to replenishment regularly and to control pollution.
· Continuous dialogue with the Industry by the Govt. to have pulse of problems and fix the problems just in time
· Infra projects / Roads projects to be focused.
· Pushing ware housing projects / in rural and semi urban areas.
· In order to increase consumption, flow of money to AGL sector / Rural area to be increased. The outlay for MANREGA may be increased which however adversely impacting agriculture activities due to non-availability of farm labors in villages. Kisan Samman amount or coverage may be increased to increase purchase power.
· Boosting export and prostration for export-oriented industries by incentives or relaxation etc.
· Bank credit for hospitals / health care units in rural/ semi urban areas not only for extending support to villages through Ayushman Bharat, but also to create job in rural areas.