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Looking London, talking Tokyo

R Srinivasan | Updated on August 08, 2019 Published on August 07, 2019

Worrisome signs: When consumers start cutting back on daily necessities it means they expect things to get worse   -  Arunangsu Roy Chowdhury

Muddled signalling is accentuating the economy’s bearish mindset

India’s Monetary Policy Committee (it may no longer be accurate to describe it as the Reserve Bank of India’s monetary policy committee), surprised the markets with a larger than expected reduction in key policy rates by 35 basis points (0.35 per cent), the fourth time it has cut rates this year since February. In fact, amongst central banks around the world, most of which have been on a loosening spree in recent times, the RBI was beaten only by New Zealand’s central bank, which cut its official cash rate by 0.5 per cent to an all-time low of 1 per cent, in a bid to kickstart slowing growth.

This should have been the strongest signal yet to the economy to go out and start spending. And stock markets, always the first to discount good news, should have soared. Instead, the BSE Sensex closed at a five-month low on Wednesday. The post facto rationalisation of the sell-off by market experts was that RBI cutting the growth outlook to under 7 per cent for the current fiscal, and the absence of any specific measures to tackle either the current NBFC mess, or revive demand for retail housing loans (the construction sector is India’s second largest employer and a key consumer of core sector products like steel and cement) led to the fizz being taken out of the rate cut announcement.

Make no mistake — the economy is in the midst of a serious slowdown in demand. Mind you, we are still growing — the RBI still expects the economy to clock 6.9 per cent growth this fiscal, which will be amongst the highest in the world. Even the most pessimistic growth forecast is pegging growth at north of 6 per cent, which on the base of a $2.7 trillion economy is still significant. Why then, this gloom and doom?

For starters, significant parts of the economy are experiencing significant pain. The automobile sector has been much in the news, threatening job cuts running into alarming millions. But more of that later. Let us look at a sector which is usually the last to feel the pain of a slowdown, since it deals with the daily necessities of a nation of 1.2 billion people — the fast-moving consumer goods (FMCG) sector.

India’s consumption story has been derailing in slow motion over the past four quarters. According to Nielsen estimates, revenue growth for the sector as a whole fell to 10 per cent in the quarter ended June 30, 2019, from over 16 per cent a year ago. Volume growth during the same period has halved, from 13.4 per cent to 6.2 per cent. Nielsen revised its growth forecast for the FMCG sector from 11-12 per cent to 9-10 per cent on the back of a sharper-than-expected slowdown in rural demand.

This is worrisome. When consumers start cutting back on soaps and shampoos and detergents and biscuits, it means that they are expecting things to get worse, not better. In fact, many have been expecting things to get worse for quite some time now, as slowing job creation, smaller pay hikes and actual job losses forced many to defer or do away with big ticket investments like buying a house or a vehicle.

When consumers get into a recessionary mindset, their consumption behaviour changes, which is why everybody from realtors to carmakers is feeling the pinch. It is also why gold — always a safe haven investment for Indian savers — is hitting new highs. Gold prices have been surging to record highs over the past few days, hitting an all-time high of ₹37,920 per 10 grams on Wednesday, with silver following suit, climbing past ₹43,000 a kg.

This is good news for gold traders but not anybody else. Take the auto sector. Even as RBI governor Shaktikanta Das was announcing rate cuts and hoping that growth would revive, Tata Motors announced a “block shut down” for a few days, halting production lines temporarily to prevent a build up of inventory.

In the case of Mahindra, despite a one-off gain of over ₹1,367 crore, the car and tractor maker's profits missed estimates.

In fact, India’s largest tractor maker saw tractor sales fall by over 14 per cent in the June quarter compared to the year-ago period, reflecting the distress in the rural economy.

The trouble is, while almost all lead and lag indicators are flashing red or amber — steel prices have hit a 19-month low, as its principal consumers like automobile manufacturers, the real estate and infrastructure sectors grapple with slowing demand and mounting financial woes — the signals from the government are only deepening the recessionary mindset gripping the economy.

Budget dampener

The Budget, of course, was the biggest dampener of the elusive “animal spirits” which finance ministers down the years have sought to unleash in the economy. Far from announcing big ticket increases in government spending on infrastructure to pump-prime demand, productive capital expenditure has actually been squeezed.

While consumers were expecting the finance minister to put more spending money in their pockets, she actually went ahead and hiked taxes on the so-called “super rich” while adding on yet more cesses and surcharges.

The GST system, meanwhile, remains very much a work in progress. While it has led to greater formalisation of the economy, the full benefits are yet to be realised thanks to a complicated filing system. This has led to tax incidence actually rising on the end-consumer in most cases. The number of rates are far too many (10) and dual rates and separate flat rates for small businesses further complicate matters.

Other signals, too, are the opposite of encouraging. The auto sector, for instance, has been hit by a series of shocks — the forced conversion to BSVI emission standards, a new EV policy which envisages all fossil fuel two-wheelers being replaced by electric within six years, a proposed five to ten-fold increase in registration charges, and so on.

This kind of muddled signalling is not the way to encourage people and businesses to spend or invest. The economy needs immediate confidence-building measures and a visible step-up in government spending to reverse the current bear grip on the market.

Published on August 07, 2019
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