Economy shows signs of structural slowdown: Govt must work on urgent stimulus plan that Budget couldn’t deliver

The latest evidence of an economic slowdown is seen in June core sector numbers. Core sector growth dropped to a four-year low of 0.2 percent dragged by significant weakness across all major segments—steel, cement, electricity industries and refinery products. The May figure has been revised downwards to 4.3 percent from the earlier estimate of 5.1 percent. Also, global analytical firm CRISIL has cut India's GDP growth forecast for this fiscal by 20 basis points to 6.9 percent citing weak monsoon, slowing global growth, and sluggish high-frequency data for the first quarter. The eight-core sector industries had expanded by 7.8 percent in June last year. These core industries comprise 40.27 percent of the weight of items included in the Index of Industrial Production (IIP). What does it tell us? There is no immediate respite seen for the economy till now. The signs of deeper trouble are flashing continuously indicating that the slowdown is turning structural in nature. The government should be worried and should think of urgent remedial actions. A slowing economy first reflects on consumer sentiments. It kills demand. This has been happening in the automobile and component making industries, fast-moving consumer goods (FMCG) companies, real estate deals, ad revenues in the media industry and corporate revenues even in other segments. [caption id=“attachment_2581732” align=“alignleft” width=“380”] Representational image. Reuters[/caption] Of these, the auto sector is a more sensitive indicator. For eight months straight, sales have been slowing across products and verticals—both passenger and commercial. Now the demand slump is beginning to show its ugly face to workers in the automobile and auto-component sector —in the form of mounting job losses. What do we know so far? According to data from the Automotive Component Manufacturers Association of India, or, ACMA, there has already been a cut of 10-15 percent of the workforce in the automobile component manufacturing sector. Naturally, when sales slow down and dealers sit on unsold inventories, component makers will lose business, which is what is happening now. The second immediate sign of a structural slowdown is a broad-based spike in unemployment. As stated above, the auto sector is already witnessing it. But, at a larger level too, unemployment is increasing. In May this year, the labour ministry data showed that India’s unemployment rate rose to 6.1 percent in the 2017/18 fiscal year touching the highest level in at least 45 years. The slowing demand scenario has had a cascading effect on the financial sector too. Non-banking finance companies (NBFC) are already in a mess due to tight liquidity conditions . The banking sector is neck-deep in bad loans accumulated over years when companies, hit by the economic slowdown and benefitting from loose lending, couldn’t pay back the money borrowed from banks on time. No one likes a crisis-facing economy. So, private investors are standing on the sidelines. They don’t want to put money on the table. This has resulted in a spike in the number of stalled projects and delayed the progress of the ongoing projects. Banks are extra cautious now to lend to industries. Only top-rated companies perceived as ‘safe’ bets get money. Others either wind up work or go for costlier finance from non-banking sources. Recently, Livemint quoted a CMIE report to state that investments in new projects have nosedived to a 15-year low in the June quarter with both private and public sectors announced new projects worth Rs 43,400 crore in June 2019 quarter, some 81 percent lower than what was announced in March quarter and 87 percent lower than during the same period a year ago. Government’s own data corroborates this. It shows that projects worth almost Rs 11 lakh crore remain ‘stalled’ or having issues. Railways, roads, and power sectors account for more than half of these stalled projects. Investors were expecting a big boost from the Narendra Modi government’s first full Budget presented by Finance Minister Nirmala Sitharaman to give a leg up to the economy. But, the Budget didn’t deliver to offer a growth stimulus beyond the usual announcements. The government must have prepared an exigency plan to tackle the economic slowdown when the initial signs came up. But, that didn’t happen. Not too late even now. There is an urgent need to spur demand by putting more money in the hands of consumers. Some tax reductions on auto and housing sectors will help achieve this goal. A special package for banks to spur housing demand will be even better. Land/labour law restrictions to win back the confidence of private investors will be a smart move. What will be disappointing is a state of denial and inaction.