Falling GDP, collapsing wholesale prices: Is Indian economy heading to its worst show in September quarter since 2008 global financial crisis?

Is India entering the sub-5 percent GDP growth range after a gap of 42 quarters? If the predictions of State Bank of India (SBI) economists offer any clue, second-quarter Gross Domestic Product (GDP) will come at 4.2 percent. That’s the lowest quarterly growth in 30 quarters ever since the new series, with 2011-12 base, was introduced. In the fourth quarter of FY13, the GDP growth had fallen to 4.3 percent. If one looks at the old series (2004-05 base), this will be the lowest quarterly growth in at least 42 quarters. In the fourth quarter of FY09, growth had fallen to 3.5 percent.

What does this mean? Indian economy may be heading to its worst quarterly GDP growth performance since the 2008-09 global financial crisis period that shook economies across geographies. That was a time when the whole world was taken by surprise by the ripple effects of Lehman crisis. Lending had come to a standstill globally as trust deficit gripped institutions. Everyone sought to preserve capital. India felt the heat too. Compared with that situation, the present growth decline in the Indian economy is a tad perplexing. There is no major crisis situation right now globally. The present slowdown is on account of the failure of the country’s domestic growth engines. Even for the government’s economists, there is no clear understanding as to what is causing a free fall in the growth.

Representational image. Reuters.

Indian economy had a shocker when the GDP growth slowed to a 6-year low of 5 percent in the April-June quarter. Even after that, there is no recovery in sight. Production figures have been flashing negative signals. The manufacturing sector has been on a decline spree. The wholesale price index (WPI) fell to a 39-month low of 0.3 percent in September on account of a continuing deflation in fuel and power components and manufactured products.

The Index of Industrial Production (IIP), a key barometer of economic activity, contracted for the second straight month in September by 4.3 percent. In August, the factory output had contracted by 1.4 percent (revised estimates).

The mining sector contracted by 8.5 percent in the month, while the manufacturing sector shrunk by 3.9 percent. Capital goods, a major indicator of investment activity, slipped by 20. 7 percent in the month of September. The consumer durables output contracted by 9.9 percent.

Most international agencies have lowered their GDP growth forecasts for India. Moody’s investors’ services has cut the GDP growth for the current year to 5.8 percent last month and later lowered the outlook to negative from stable. Japanese brokerage Nomura has gone a step further to cut the GDP forecast to a 4.9 percent as against its earlier forecast of 5.7 percent noting that the economy is going through a 'deeper trough' and any chances of recovery are far away. The United Nations Conference on Trade and Development (UNCTAD) has pegged India's economic growth rate at a seven-year low of 6 percent.

There are multiple challenges at this stage. Indian economy is suffering from a major demand slump. Consumer confidence is at the lowest level in six years. People are either cutting short spending or postponing purchases fearing job losses or bleak business situations. The unemployment rate is at a 45-year high. Per capita income, a key measure of prosperity in an economy, is falling. The average consumption expenditure at current prices fell from Rs 1,587 per person per month (ppm) in 2014 to Rs 1,524 ppm in 2017-18 in rural areas while in urban areas it fell from Rs 2,926 ppm in 2014 to Rs 2,909 ppm in 2018.

Uneven monsoons, floods and drought situations impacted the farmers hard in recent years. As an answer to the rural distress, the states ruled by Bharatiya Janata Party (BJP) mainly deployed farm loan waivers and higher minimum support process as part of the election promises. But, even that hasn’t worked to give relief to the over-indebted agriculture workers. The government is now planning to relaunch farmer produce organisations (FPOs) to revive the sector, a step, organisations like NABARD, has tried in the past.

What is lacking a coordinated action plan between the government, think-tanks and central bank to revive the economy. There have been several sector-specific measures announced by the government so far to infuse confidence in the economy. But, the extent of slowdown warrants more than baby steps. The government should not delay crucial land and labour reforms that are essential to attract fresh businesses.

The Goods and Services Tax (GST) in its current form, is a turn off for small businesses. The GST slab structure needs to be narrowed down to three as PMEAC chairman Bibek Debroy and former chief economic advisor (CEA) Arvind Subramanian suggested. The government needs to hurry with the disinvestment programme especially in large public sector undertakings (PSUs) instead of merging the weak ones. Ease of doing business should be felt on the ground, not just in survey rankings.

The monetary policy committee (MPC), which has already cut by a cumulative 135 bps so far in the current rate cut cycle, might go for another 25-50 bps cut in the remaining part of the year. But, for an economy hit by huge demand slump, rate cuts cannot work well, especially when inflation levels are falling below target. The government is set to miss the fiscal target on account of lower-than-expected tax collections and spending pressure. But, given the depth of slowdown, the immediate priority should be to step up spending and put more money in the household kitty to encourage spending.

(Data support by Kishor Kadam)