The gross domestic product (GDP) growth, a measure of economic growth, for the period July to September 2019, came in at 4.55 percent. This was the slowest growth during the period Narendra Modi has been prime minister of the country.
In fact, this was the slowest growth since January to March 2013, when the economy had grown at 4.30 percent, when Manmohan Singh was prime minister. The economic growth during the period April to June 2019, had come in at 5.01 percent.
Let’s take a look at this fall in economic growth in slightly more detail.
1) The industry grew by a minuscule 0.52 percent in comparison to the same period last year. In fact, this is the slowest growth in industry since June 2012 (basically across the period for which such data is available).
2) Manufacturing forms bulk of the industry. The size of the manufacturing sector during July to September 2019 contracted by 1.05 percent in comparison to the same period last year. In fact, it’s only the second time that the manufacturing sector has contracted in size since June 2012.
3) The construction sector is an important part of industry. The growth in the sector slowed down to 3.33 percent in comparison to July to September 2018. This is the slowest in nearly two and a half years.
The construction sector is very important for India’s continued economic growth, simply because it generates a lot of low-skilled and semi-skilled jobs, which are necessary to move the excess workforce in agriculture (India’s huge disguised unemployment) away from it. India's agriculture sector currently employs many more people than is economically feasible. The only way to move people away from it is to create jobs in construction.
4) Take a look at the following chart. It plots the growth rate of manufacturing, construction and industry, over the years.
The curves representing industry in general and manufacturing and construction in particular, are all downward sloping, which basically tells us that things haven’t been in a great shape in the recent past.
5) The question is what is happening here? The downward sloping curves show the lack of consumer demand more than anything else. Sales of everything from cars, scooters, motorcycles, mopeds, tractors and commercial vehicles, have been contracting through this year. The volume growth of FMCG companies (unit sales) has fallen dramatically through this year. There have been many news reports regarding the slowdown in growth of items as basic as vests and shaving blades.
Given this, the manufacturing sector does not have to produce goods at the same pace as it had in the past. All this ultimately reflects in slow industrial growth of just 0.52 percent.
Along similar lines, the demand for new homes built by real estate companies has come down dramatically primarily because prospective buyers do not want to buy under-construction property. Also, high real estate prices have acted as a dampener on sales as well. This reflects in slow growth of the construction sector.
6) What hasn’t helped is the slow-growth of the agriculture sector. The sector grew by 2.08 percent during July to September 2019. It had grown by a very similar 2.04 percent during April to June 2019. This is the other side of low food inflation (the recent high onion prices notwithstanding). What does not help is the fact that 43.2 percent of India’s workforce is employed in agriculture. Hence, a slowdown in agricultural growth leads to the purchasing power of a large section of the population coming down. And that can’t be good news for the overall economy.
7) The services sector which typically tends to make up for 50-60 percent of the Indian economy, grew by 6.81 percent during July to September 2019. While this is much better than industry, the point that needs to be noted here is that between June 2014 and June 2017, the sector grew regularly at 9 percent or higher.
Also, even within the sector, the growth was primarily driven by public administration, defence and other services, which grew by 11.61 percent. This is basically nothing but the government spending more. There has been a considerable slowdown in trade and financial services.
8) What all this tells us is that India’s problem right now is the lack of consumer demand. The thing is this is not going to go in a hurry primarily because the psychology of an economic slowdown is well and truly in place. What this means is that a large section of the society does not have confidence in their economic future and would rather not spend money at this point of time.
And once such a psychology is in place, there isn’t much that any government can do about it, especially the current one which continues to be in a denial mode.
(The writer is the author of the Easy Money trilogy).
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Updated Date: Nov 30, 2019 14:04:17 IST