The Hindu Business Line : Economy headed for more pain in 2009

The real problem facing the economy today is the ongoing demand recession both in the export and domestic markets. Despite the two stimulus packages, the outlook for the economy continues to remain grim as the packages contain limited deficit financed direct spending by the Government.

— Sampath Kumar

The country’s employment scenario is getting bleaker with each passing month.

S. D. Naik

Going by all the available indicators, it appears that the Indian economy is clearly headed for more pain in 2009. The continuing flow of bad news on the economic front has forced the Government to announce a second stimulus package on January 2 in less than a month after it had unveiled the first package on December 7.

The second stimulus package covers a series of measures aimed at easing credit delivery to sectors most impacted by the economic slowdown along with monetary measures by the RBI — a cut in repo and reverse repo rates by 100 basis points each or one per cent and the cash reserve ratio (CRR) by 50 basis points to ease lending rates by banks.

Grim outlook

Despite the two stimulus packages announced by the Government within a month, however, the outlook for the economy continues to remain grim as the packages contain limited deficit financed direct spending by the Government. In any case, there was hardly any headroom for the government to do so considering the fast deteriorating fiscal position.

According to the estimates released by the Central Statistical Organisation (CSO), the country’s GDP growth at 1999-2000 prices has decelerated to 7.6 per cent in the second quarter of 2008-09 from 7.9 per cent in the first quarter. Thus, the growth for the first half of 2008-09 works out to 7.8 per cent as compared with 9.3 per cent recorded in the first half of 2007-08.

The mid-year review of the economy released by the Government on December 23 has projected that the country’s economic growth would moderate to 7 per cent from 9 per cent recorded in 2007-08. According many economists, even this projection is unduly optimistic considering the dismal performance of manufacturing and exports in recent months.

Incidentally, the World Bank which has forecast a growth of just 0.9 per cent for the world economy in 2009, has offered a grim forecast for India this year with the GDP growth declining to just 5.8 per cent. According to the Bank, the world is on the brink of a rare recession, with global trade expected to fall for the first time since 1982 and the capital flows to developing countries predicted to plunge 50 per cent.

Industrial slowdown

The country’s industrial growth contracted by 0.4 per cent in October 2008 for the first time since April 1993 and the Prime Minister’s Economic Advisory Council Chairman, Dr Suresh Tendulkar, has noted that there will be no respite from industrial slowdown till end-2009. The negative growth in the index of industrial production (IIP) in October represents a sharp slump from the robust growth of 12.2 per cent recorded in the same month of 2007.

The manufacturing segment comprising 80 per cent of the IIP posted a negative growth of 1.2 per cent in October last year compared to a hefty growth of 13.8 per cent in October 2007. Moreover, the production growth in two of the four segments that make up the manufacturing index — intermediate and consumer goods — shrank to minus 3.7 per cent and minus 2.3 per cent in October 2008, a sharp dip from 9 per cent and 13.7 per cent respectively during the corresponding month of the preceding year.

Between April and October 2008, the IIP registered a growth of 4.1 per cent compared with 9.9 per cent in the same period of 2007. Indications are that the slowdown in industrial production, particularly the manufacturing segment, will persist in the remaining months of the current fiscal considering the ongoing demand recession both in the export and domestic markets.

All the indicators — negative export growth in two successive months of October and November 2008, decelerating growth of infrastructure sectors, a sharp decline in the production of capital goods, slowing sales of automobiles and a fall in the growth rates of indirect tax collection rates — allude to the deteriorating health of the economy.

The earnings and profit margins of the corporate sector have come under considerable pressure in the third quarter of the current fiscal.

This is also reflected in the advance tax collections which have declined by over 22 per cent to Rs 42,600 crore in the third quarter (October-December) from Rs 54,900 crore in the same period a year ago.

Experts believe the fourth quarter and the next fiscal could be still worse for the corporate sector.

Job losses

With the slowdown in manufacturing as well as services following the global financial crisis, the country’s employment scenario is getting bleaker with each passing month. From banking and finance to aviation and tourism, from manufacturing to information technology, companies have not only gone slow on new recruitments, but have been forced to resort to job cuts. Job losses have been across sectors and from high-end jobs to low-end jobs.

Industries that have been hit hard include steel, aluminium, automobiles, auto components, gem and jewellery, leather and leather products and producers of a large number of engineering products. Housing and realty is another sector that is experiencing recession and substantial job losses. Such losses have been more pronounced in export-oriented industries.

Following a big fall in textile exports, some seven lakh workers in the sector have already lost their jobs over the past six months and another five lakh are expected to lose their jobs over the next few months. The gem and jewellery industry has laid off 100,000 workers so far and there could be more job losses in the coming months.

The most hard-hit are the small and medium enterprises (SMEs), which have been reeling under heavy power cuts and credit crunch apart from export slowdown. While precise numbers are not available, according to estimates, job losses in these enterprises so far have run into several million.

The real problem facing the economy today is the ongoing demand recession both in the export and domestic markets. The demand recession in the domestic market seems to be intensifying because of large-scale job losses, companies putting on hold their new investments and expansion plans, significant slowdown in capital inflows and a slump in capital market.

Demand recession

Fortunately, the falling rate of inflation over the past several weeks because of the sharp fall in international crude prices as also the other commodity prices in the international markets has enabled the Reserve Bank of India to initiate a series of measures in quick succession to inject more liquidity into the system and encourage banks to lower their lending rates.

While most banks have also lowered their lending rates to some extent, so long as the purchasing power in the hands of the people remains low leading to continuing demand recession, the demand for credit and goods and services is unlikely to pick up. To add to the problem, the projected decline in the agricultural growth rate this year could only depress the rural demand further.

Unfortunately, the two stimulus packages unveiled by the Government in quick succession contain only a small dose of direct additional capital expenditure by the Government because of the severe fiscal constraint.

The indirect measures may yield some results with a time lag of nine months to one year.

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