The Mayday economy

Venky Vembu | Updated on March 29, 2019

Grounded: The cash-strapped airline is burdened by debt — over ₹8,000 crore, by some estimates — and has defaulted on bank loan repayments   -  REUTERS / DANISH SIDDIQUI

The flashes of angry red are not confined to Jet Airways; they have spread across the sectors indicating all-round slowdown and distress ahead

There is, it’s fair to say, never a good time to receive distress signals of the sort aviators and mariners put out. And yet, the Mayday alerts currently floating on Indian airwaves, barely a fortnight before one of the country’s most consequential elections gets under way, appear particularly ill-timed.

The most proximate reason for the jangle of these alarm bells is, of course, the feared financial crash-landing of Jet Airways, one of India’s oldest private airliners, which was once celebrated as a high-altitude symbol of Indian aviation success. The cash-strapped full-service airliner is burdened by debt — in excess of ₹8,000 crore, by some estimates — and has defaulted on loan repayments to banks. In more recent months, so straitened have its means become that it has stopped paying salaries to its staff, and has suspended services on many routes after lessors grounded planes for non-payment of dues. An emergency infusion of cash may yet provide it the kiss of life — although it may not be much of a life thereafter — but Etihad Airways, which owns a 24 per cent stake in Jet, has made clear its intention to cut and run.

Fearful of the consequences of a crash-landing in the lead-up to the elections, and the poor optics of such an eventuality, the government has predictably sent out word to state-owned banks, which are already grappling with a mountain of bad loans, to do whatever it takes to bail out Jet and keep it from bankruptcy. The consideration that this may only end up spreading the contagion, and may worsen the prospects of an eventual resolution of the problem, is evidently secondary to the need to paper over the cracks and send out the calming message that all is well beyond the pearly gates of the Potemkin village.

And yet, as traumatic as it may be to see an airline struggle to stay airborne, barely bearing aloft the fortunes of its 22,000 employees, that isn’t really the most worrisome prospect that confronts the economy today. Rather, it is the distress signal of an entrenched slowdown that is flashing across broad swathes of the economy — with the very real risk that things may get worse before they get better.

Indicatively, a proprietary economic ‘heat-map’ of high-frequency data, drawn up by Nomura Securities based on 33 indicators, which provides a comprehensive view of the positive and negative drivers of GDP growth, is flashing an angry red across sectors. Consumption indicators are manifesting signs of endemic weakness, with auto sales in particular slumping across segments — from passenger cars to two-wheelers to tractor sales. Additionally, weak rural wages, diesel consumption, and cellular subscription point to a slowdown in rural consumption.

Likewise, a sharp fall in commercial vehicles sales growth, and a slowdown in the aviation and railways sectors, presage that non-financial services too are on infirm ground. And many of Nomura’s proprietary forward-looking leading indices confirm the moderation that, in its estimate, is to come.

Even in the best of times, these would be worrisome signals, but in an environment where much of the global economy is running out of breath, the Mayday alarm bells are jangling right across the map. In large parts of East and Southeast Asia, for instance, exports have pretty much collapsed. China’s exports are down 20 per cent year-on-year, Korea’s by 10 per cent, and Japan’s new machine tools orders, a bellwether of the state of its economy, are sharply down. Europe, too, is looking very sick: Italy is in recession, and manufacturing output in Germany has contracted for the third straight month.

And if all this bad news wasn’t quite enough, global bond markets are signalling a US recession, perhaps as early as next year, as the effect of the trade wars and tariffs comes home to roost. Just last week, long-term interest rates fell below the short-term rates: The so-called ‘inversion of the bond yield curve’, for the first time since 2007, has an impeccable record over 60 years of reading the tea leaves to predict a recession.

To that extent, it’s fair to say that none of these slowdown problems are unique to India, which, in fact, is looking reasonably well-placed in comparison. And yet, for all the inherent strengths of its economy, it’s just as true that India lacks the elbow-room to initiate counter-cyclical policy actions to cushion itself from the malefic effects of the global slowdown. That, sadly, is a direct consequence of the political failure to do the grunge work when times were good, and of scoring self-goals — such as the ill-advised demonetisation initiative.

And now, with the election season upon us and with parties competing in the populism sweepstakes with complete disregard for fiscal rectitude, the near-term prospects for the macro-economy appear distinctly downbeat. Whichever party comes to power will have a laundry list of bills — in the form of pre-election promises — to pay up. Ammunition, of the sort required to fire up the economy, will likely be in short supply — even without budgeting for financial crash-landing of down-and-out airlines.

Venky Vembu   -  BUSINESS LINE


Venky Vembu is Associate Editor, BusinessLine;

Published on March 29, 2019

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