Economic slowdown: Why there will be no honeymoon period, no scope for window dressing for India’s next government

Slowing vehicle sales, muted consumer spending, low retail loan outflow and struggling factory output are indicating a worrying trend of an economic slowdown in Asia’s third-largest economy. But, it’s not just about the domestic indicators, even foreign trade is showing signs of stress that could weaken the chances of an economic rebound for India in the near-term. At a time when Indian politicians are celebrating the grand return of competitive populism as a short-cut to win votes, promising free income and job reservations to the majority of Indians, exports are slowing and imports are climbing, further weakening the government’s deficit figures. In fact, the export growth dropped to a four-month low of 0.64 percent in April. The dip was visible across segments—engineering goods, gems and jewellery, leather and other products. On the other hand, imports have gone up by 4.5 percent—the highest growth in the last six months as crude oil and gold shipments shot up in April 2019. [caption id=“attachment_4216037” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] Merchandise exports stood at $26 billion in April while imports at $41.4 billion, leading to a trade gap of $15.33 billion. All this means the trade deficit has widened to a five-month high since November 2018. Economic growth is slowing in important markets. This holds true for China, the United States and Europe, too. In China, industrial production growth—the output of industrial sectors in China’s economy, including manufacturing—fell to 5.4 percent from 8.5 percent in March, a report said, adding retail sales, a measure of consumer demand in China, grew by 7.2 percent in April, well below 8.7 percent rate in March and the lowest in 13 years. Remember, this is even before the heat of an ensuing trade war tariffs had taken effect. In the US, the vehicle sales have been slowing and top executives in auto firms are worried about the state of the falling auto sales figures, the CNBC reported. A host of other indicators too is pointing towards a slowdown phase in that economy. In Europe, things aren’t better either. That region is on a shaky wicket. If the US-China trade war escalates and the tariff war spills over to Europe, it will take a toll on the region. This will have a direct impact on India’s prospects in a highly integrated world economy. What will be another deciding factor for India is the course of oil prices. Speculations are tilted towards a rise in crude prices if the US-Iran tensions worsen. For India, which relies on imported oil for 80 percent of its domestic use, a spike in oil prices will not be good news as the government is already running a tight balance sheet. A part of the blame for slowing exports can be blamed on seasonal factors but the reality is a prolonged slowdown is staring at India. How bad it can be? Rathin Roy, Prime Minister’s Economic Advisory Council (PMEAC)  recently warned about a middle-income trap in Indian economy. Speaking to NDTV, Roy explained the scenario when the consuming top 100 million middle-income groups cut don their spending, causing a demand lull. The manufacturing sector, a job creator, is faltering. The Index of industrial production or IIP for March contracted by 0.1 percent as against 5.3 percent growth in the year-ago period. That’s the slowest growth in at least 21 months, revealed data. In June 2017, IIP growth contracted by 0.3 percent. In the April-March period, the IIP grew by 3.6 percent. During fiscal 2018 (April-March), the factory output had grown 4.4 percent. In April, the Nikkei/IHS Markit Services Purchasing Managers’ Index (PMI) dropped to 51.0, which is the lowest level since September. The unemployment situation in the country is largely an undermined issue. The Narendra Modi-government has been refusing to admit it but a set of numbers put out by Centre for Monitoring Indian Economy (CMIE) shows rising unemployment in the country. According to CMIE data, India’s unemployment rate in April accelerated to 7.6 percent , the highest since October 2016, and up from 6.71 percent in March 2019. How bad can the economic slowdown be? Are we looking at the start of a recession? Economists rule out a recession for India even though they do not mince words while warning about it.

“On the global front trade wars can knock off a few bps from growth but they cannot cause recession. The central banks in advanced countries have already turned dovish. Domestic slowdown is cyclical and needs continuous monitoring. For this fiscal monsoons and oil will play a key role in economic outcome (sic),” said D K Joshi, Chief economist at Crisil rating agency.

Gaurav Kapur, the chief economist at IndusInd Bank Ltd, said. “Technically a recession is two consecutive quarters of negative growth. India is certainly not looking at that kind of scenario, even if growth is slowing down.” How long will the slowdown phase last for India? Predicting a turnaround is difficult as of now even for seasoned economists. It will take tremendous effort for the country to revive falling demand, get its finances on track and deal with a slowing world economy. There will be no honeymoon period for India’s next government; no amount of window-dressing can work. The task on the economic front is clearly cut out for the next incumbent. (Data support by Kishor Kadam)