Serious slowdown calls for demand-side steps

News on the Indian economy is getting worse by the day. India’s leading bank, SBI, has projected Q2 growth at 4.2 per cent and growth for 2019-20 at 5 per cent, way below the Reserve Bank’s estimate of 6.1 per cent for the current fiscal. The SBI’s Ecowrap newsletter observes that only 27 per cent of the 33 high frequency indicators have shown an acceleration in the September quarter, against 63 per cent in Q2 of 2018-19, when the growth rate was 7 per cent. There is almost no redeeming feature to suggest that the worst is over, with the index of industrial production dipping by 4.3 per cent in September, after falling 1.1 per cent in August, year-on-year. Core sector output, which accounts for 40 per cent of the IIP, recorded a 5.2 per cent dip in September. Diesel and ATF output have fallen. Tax revenues from GST are way behind target, reflecting sluggish output and adding to the fiscal stress.   

The fall in overall demand is the leading cause of the slowdown. Goldman Sachs’ research observes that 40 per cent of the current slowdown is on account of the slump in global trade, 30 per cent from the slowdown in consumption, and the rest due to the liquidity crisis that followed the meltdown of IL&FS. It observes that the deceleration in consumption predates the IL&FS debacle. Add to this, the lingering effects of demonetisation and the maladjustment to GST, made worse by banks becoming risk-averse, and we have a perfect storm of forces at work.

There has been a steady dip in the growth rate of private final consumption expenditure, from 9.8 per cent in Q2 of 2018-19 to 3.1 per cent in Q1 of this fiscal. There are little signs of an upturn here, with jobs being shed across a swathe of sectors, from auto to telecom. Besides, crop damage is a huge cause of distress in many States, and is likely to depress rural demand.  If it is  true that rural consumption actually fell in 2017-18 over 2011-12 (the Centre has withheld the release of the NSO’s household expenditure survey, citing ‘data quality’ problems), then the dip in rural demand could well be a humanitarian crisis. 

Extraordinary crises calls for extraordinary responses. The Monetary Policy Committee has reduced rates by 135 basis points in this calendar year. Corporate taxes have been cut. NBFCs have been funded and pushed to lend. The real estate sector has received a package to complete stranded projects. But if demand remains tepid in a scenario of uncertain future incomes, cheap credit will not help. In fact, as the Ecowrap report indicates, credit in the absence of incomes could lead to fresh debt issues. Private investment is unlikely to pick up even after the cut in taxes, if demand remains poor. The tax cuts may help reduce corporates’ levels of leverage, and shore up their balance sheets and stock values, creating a limited wealth effect. 

A revival in auto and construction sectors will not be enough to restore growth. The Centre should channelise its disinvestment proceeds towards creating public assets with a multiplier effect, such as rail infra, roads, schools and hospitals. The MPC should not read too much into the October retail inflation going beyond the 4 per cent threshold. This has been primarily led by the 7.9 per cent spike in food items, reflecting a supply crunch in the wake of crop damage. The wholesale price index was up just 0.16 per cent in October, reflecting weak demand. There is scope for the MPC to cut rates further. It should not react to food inflation, where some relative price increase might actually help create demand for other products.

COMMENT NOW