Economic Slowdown
By Dhurjati Mukherjee
In a bid to counter the recessionary trend, Finance Minister Nirmala Sitharaman last week announced a few measures, including scrapping surcharge on foreign portfolio investors and domestic market players and steps to improve the flow of loans and overall cash in the system. This is expected to boost market sentiment as FPIs had withdrawn close to $3.4 billion since July. She further announced that banks have agreed to lower interest rates on the benefits of RBI’s rate reduction besides linking interest on home, auto and retail loans to the Central bank’s key policy rate. And to support the ailing non-banking finance companies a fresh Rs 30,000 crore refinance window for housing finance companies was also announced.
All this appears no doubt quite encouraging but it will be difficult to counter the reduced consumption expenditure in most fronts, not just in rural but also in urban areas. The latest devastating floods in States such as Maharashtra, Kerala and Karnataka is bound to divert chunks of funds from development projects to flood relief and rehabilitation. Also the purchasing power of the rural segment of the population will be greatly reduced not just due to such calamities but also farm distress and lack of jobs.
And apart from the ongoing distress in the agricultural sector, which is ongoing for long, there is the real estate sector, where reports say that the country’s top 30 cities had around 1.30 unsold housing units as of March 2019 which may have increased by this time. This sector had been ailing for quite some time and the present situation is not at all conducive. More so as the real estate and construction industry will bear an impact not just on steel and cement sectors but also on fittings, paints etc.
As per a statement by Niranjan Hiranandani, President, National Real Estate Development Council (NARDECO), around 3 lakh jobs have been lost in the real estate sector. A survey by consultancy firm, Knight Frank, FICCI and NARDECO, factors such as NBFC crisis, developer defaults and bankruptcies have slackened the sentiment in this sector as also the on-going liquidity crunch.
Then there is the auto sector which has been greatly affected with huge job losses, resulting in sales tumble to a 19-year low since July. Many companies like Mahindra & Mahindra, Toyota, Hyundai etc. have retrenched temporary workers and stopped production for a few days in August. The same is the story with tyre and tube manufacturers, parts manufacturers and dealers. The industry’s plight was recently highlighted by the Automobile Component Manufacturers Association of India (ACMA) and the Society of Indian Automobile Manufactures (SIAM). Not just these organisations but experts confirmed the recessionary phase being experienced in this sector.
There are widespread reports of stagnation in the economy. While farm distress and jobless growth has been continuing for quite some time, sectors such as real estate, construction and auto industry have too been hard hit. There were expectations that the Budget would boost up the economy but its policies haven’t helped the process of industrial growth. Moreover, foreign portfolio investors have sold their holdings in massive quantities, affecting sentiments in the capital market.
Investment, both of public and private sector, is lacking as per Centre for Monitoring Indian Economy (CMIE), implementation of projects worth Rs 13 trillion has been stalled with the private sector lagging behind. While the stalling rate of private sector projects was around 30 per cent, power sector suffered the most.
Terming the present slowdown ‘worrisome’, former RBI Governor Raghuram Rajan, said recently that new set of reforms are needed to motivate the private sector to invest. He referred to the power sector and the non-banking financial sectors which needed to be tackled immediately. However, Rajan was clear that a stimulus package, which the industry has been pressing the government to implement, isn’t going to be “useful in the longer term, specially given the very tight fiscal situation that we have”.
The perception that all this has happened due to GDP growth recording 5.8 per cent in the fourth quarter of 2018-19 is erroneous. One may be reminded of the observation of former Chief Economic Adviser Dr. Arvind Subramanian, of the country overestimating its growth rate by 2.5 per cent between 2011-12 and 2016-17.
It may also be mentioned that he derived several implications from the findings of his paper which are: one, that growth needed to be restored to high levels; two, that the quality and integrity of data in India needs to be improved, something echoed by several other economists and three, that “India must restore the reputational damage suffered to data generation in India across the board.” He also called for the creation of a taskforce to revisit the entire methodology and implementation of GDP estimation.
There has been high growth rate during the previous years but it hasn’t helped in tackling farm distress or job creation. A large body of economists believe that high growth rate has been and is beneficial to the upper class and middle income sections. The poor and EWS do not benefit much from high growth and this has been demonstrated not just in academic research but also in practical field.
Surprisingly, there appears very little concern of the government and also its think tank, the NitiAayog. Only recently, Sitharaman had assured that corporate tax rate would be cut to 25 per cent for companies with a turnover of Rs 400 crore, reiterating the promise she made in her Budget speech though no date for its implementation has been set. Thus, as it appears today, no revival action has been taken.
The first thing that needs to be done now is for the public sector to invest in infrastructure sector and also try to get at least some private companies to do the same. Infrastructure development in rural and semi-urban areas should be the focus of attention as has recently been suggested by eminent economist Prof. Amiya Bagchi. He also added that adequate investment had not been made in education and health sectors and these areas need to be looked into. Though the fiscal position is tight, a section of economists feel that in such core sectors, where large sections of people are likely to be benefitted, such expenditure, even if it raises fiscal deficit, is justified.
While there is no doubt, that the situation is quite bad, measures need to be taken to control it. In the short term, there should be no reduction in development expenditure, specially related to the rural sector, but curbs imposed on bureaucrats and ministers, specially their travel expenses, both in the country and abroad. No stimulus need be given to the private sector and the big defaulters should be penalized and brought to book.
Apart from this, public-private partnership should be encouraged. As envisaged, around 7-8 per cent of equity of public sector units where government holding is over 60-65 per cent may be divested through a public issue to ensure participation of the common people, thereby generating resources. But to get the right price, there is need for improvement of the capital market. Notwithstanding the Finance Minister’s bid to tackle the slowdown, the government needs to spell out clearly structural reforms that are envisaged in the middle and long term. INFA