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.
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.
