Revival of economy requires swallowing bitter pill

The US Fed rate cut last month signalled that the world economies linked to the US dollar are under stress. Also, the  International Monetary Fund (IMF) cut global gross domestic product (GDP) expectation from 3.2% to 3.1% while India’s GDP slowed down to 5% in the second quarter this fiscal. The debate and discussion in the media has been on: are we heading for a recession or has the economy hit a slowdown as a natural phenomenon of the business cycle?

Growth rate of the Indian economy is linked more to the agriculture and services sectors than to others. But the precipitous fall in business confidence and consumer confidence indices, slowdown in savings and investment rates, and in capital  formation signal the necessity of corrections on different fronts. 

A fall in the growth of real estate, automobiles, and core sectors warranted policy corrections. It is, however, doubtful whether a stimulus is required. Moody’s expect the growth of the economy to be at 6% current fiscal. A 6% GDP growth in an overall depressing scenario in the rest of the world, should be seen as encouraging but that does not leave any room for complacence. 

The IFO World Economic Survey, released every quarter, says in its recent statement: “In the emerging and developing Asia, the climate indicator fell, from +2.1 to –12.1 balance points. This figure mainly reflects the negative developments in China and India. 

The ASEAN-5 countries (comprising Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) saw a renewed downturn in their economic climate, from 34.6 to 21.3 balance points. The present economic situation continued to deteriorate but remained at a satisfactory level. The best economic climate is reported for Malaysia and the Philippines.” Malaysian Ringgit, it says, is undervalued vis-à-vis US$.

INFLATION RATE 

Retail inflation in India fell to 3.15% year-on-year as of July 2019, less than the RBI inflation target of 4%. A growing economy should be having a healthy inflation index. High growth rates in the past were achieved against high inflation rates. 

An alarming rise in inflation to 12.17% in 2013 provoked the RBI to take stiff measures to bring it down to the inflation expectation target. Deflationary trend will send negative signals for growth. A comparison between India and China in terms of Inflation rates indicates peaks and turfs but do not cause the economy to shrink to lows, bringing it close to recession. 

On the retail price front, inflation accelerated to a nine-month high, though remained moderate and below its long-run average. If we can maintain at the RBI an expectation at 4%, that is a rise of 0.75 in the inflation rate, the economy will bounce back to a growth level of average 7%. 

GDP Per capita 

Comparing with US dollar, per capita GDP in India was 2104.20 in 2018, which is equivalent to 17% of the world’s average and it was at a record low of $330.20 in 1960. 

Poverty index also fell to a low of less than 20%, going by the Niti Aayog data. Bourgeoning middle class and conspicuous consumption would not disappoint the retail markets, particularly the fast moving consumer goods (FMCG) sector. This would mean that the slowdown would be a temporary phenomenon.

Consumer Confidence Index:

Consumer confidence in India fallen to 95.70 index points in the third quarter of 2019 from 97.30 in the second quarter of 2019. It is way below the average of 103.10 for the period from 2010 until 2019. It has been falling since demonetisation but started rising till the second quarter of 2018. Thereafter, the fall has been precipitous. Reversing this requires more than pep talk. 

The goods and services tax (GST) has a sagging effect not merely on micro and small enterprises but also on consumers. While it has brought about the much needed business discipline and tax compliance, input credit delivery suffered gradually eroding the confidence in the system. This needs reversal sooner rather than later. 

Bank mergers contributed to the erosion in consumer confidence. Mergers led to distancing the reach of banking to the people, notwithstanding the new initiatives like the small finance banks, postal bank, small payments bank, Rupay card and Micro Units Development and Refinance Agency Ltd. (MUDRA). 

The speed of service through technology is different from the reach. Caring for customers has vastly eroded in the banks. Apps may be attractive but difficult to access for the semi-literate rural clients. If growth of the services sector is declining, financial services has a major contribution to this failure. This needs quick reversal.

BUSINESS CONFIDENCE INDEX

The business expectations index (BEI) fell to 112.8 in the second quarter of 2019-20 fiscal year from 113.5 in the previous three-month period. The index in India averaged 117.74 from 2000 until 2019, reaching an all-time high of 127.50 Index in the second quarter of 2007 and a record low of 96.40 Index in the second quarter of 2009.

Ups and downs are part of business cycles. Several states indulge in make believe efforts when it comes to projecting ease of doing business. Still, several departments and public sector companies indulge in the procedural rigmarole for paying the bills and releasing the promised incentives. 

It is necessary that all states should revisit their industrial incentives as to what they can easily deliver and what they cannot, and whether the incentives are delivering the intended benefits at the right time. Giving rise to undeliverable expectations brings down the business confidence index. This needs correction.

MANUFACTURING NEEDS A BIG PUSH

The IHS Markit India manufacturing PMI (purchasing managers’ index) dropped to 51.4 in August 2019 from 52.5 in the previous month and below the market expectations of 52.2. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since May 2018.

Output rose the least in a year and new order growth slowed to a 15-month low, with overseas sales increasing at the softest rate since April 2018. Backlog of works and project delays continued. Employment levels continue to cause concern with not so good results seen even against the huge investments made in skill development. 

Source: https://tradingeconomics.com/india/manufacturing-pmi

Technology and markets are growing at a rapid pace, throwing up new opportunities. More than 75% of global growth in output and consumption is in the emerging markets. High tech advancements like the industrial internet of things, machine learning (ML), artificial intelligence  (AI), though have become buzz words in the Industry, they are yet to catch up in all the segments of manufacturing. 

Some of the announcements like relaxations in foreign direct investment (FDI) policy touching retail and media, government junking old vehicles and replacing them with new ones will trigger a demand in auto sector only marginally. Cost-cutting across the supply chain remains a major priority. 

Addressing the workforce skill gap remains a challenging priority. Manufacturers can address the skills shortage by forming partnerships with schools, associates and even competitors to train and recruit talent at an early stage.  But there exists a gap in the confidence of industry to partner with educational institutions, irrespective of the emphasis that Modi and several state governments like Telangana have laid on it. 

Though labour code has been introduced with the consolidation and rationalisation of 12 labour laws, the increased burden of social security and minimum wages requires re-engineering of business processes and restructuring of organisations and this may require some more time. 

In order that the industry develops its own push-pull measures, tax breaks can be planned by the government for research and development. Corporate social responsibility (CSR) targets can also be dovetailed for a soft touch to the markets. When the morale is sagging, demand generation is hard to come by. Every measure from the government addresses just one or the other key component of manufacturing investment. It needs to be a facilitator and catalyst rather than pumping money into the economy. 

The areas where it should pump money are public investments in infrastructure and fast delivery of contract payments. Quick credit of input tax on payment of GST will also help. But unless state governments also come on board, avoid wasteful expenditure, monitor all their investments for quick results on an on-going basis and review the situation periodically through accredited third-party agencies, it will be difficult to reverse the slow growth.