Sensex tanks 500 points as scrapping of Article 370 spooks investors; a reminder why govt shouldn't lose focus on sinking economy

  • Structural reforms might have put a temporary speed breaker on the economy as these changes result in a realignment in the existing processes

  • The current phase of economic slowdown is much bigger in scale and cannot be blamed upon reforms alone

  • The demand slump is visible in the most depressing way in the auto sector and this has led to lakhs of job losses.

NITI Aayog Chief Executive Officer (CEO), Amitabh Kant is of the view that too much of a wave of reforms undertaken by the Narendra Modi-led government has contributed to the current slowdown in the Indian economy. "One of the reasons for the slowdown is that it has had too much of reforms—GST (Goods and Services Tax),  IBC (Insolvency and Bankruptcy Code), RERA (Real Estate Regulatory Authority)—a huge set of reforms which we have undertaken and I think the next round of reforms must revolve around sectors like oil and gas, mining, coal," Kant said at Bloomberg NEF Summit in New Delhi

Kant indeed has a point here; structural reforms such as IBC and GST might have put a temporary speed breaker on the economy as these changes result in a realignment in the existing processes, but works well in the long-term. But, the current phase of economic slowdown is much bigger in scale and cannot be blamed upon reforms alone. This a clear case of governments, including the UPA, failing to do the right things at the right time, i.e., inspiring confidence in the business community by acting on land and labour reforms and exiting businesses that lock in a large amount of capital.

Kant himself alludes to these issues in some way. “Firstly, you need to bring in greater levels of liquidity. Secondly, you need to revive the animal spirit of the private sector, you can never create wealth without the private sector. Thirdly, the government needs to get out of business in a range of areas and you need to recycle a lot of government assets such as roads.” Lack of action in these areas has indeed slowed down the economy a lot.

There are a few primary reasons why the economy is in the current sad state today. A severe demand slump that was triggered by demonetisation in 2016 paralysed informal markets, the impact of which continues even today. The ongoing liquidity crisis has added fuel to the fire. Also, a weak global economy has taken its toll on India; exports have been declining at a faster pace. Lack of fresh private investments have been hurting even existing projects, forget about the launch of new ones. Add to that a worrying rural distress and government’s populist spending spree.

 Sensex tanks 500 points as  scrapping of Article 370 spooks investors; a reminder why govt shouldnt lose focus on sinking economy

Representational image. Reuters.

The biggest challenge before the government is to revive the demand. At this point, that seems to be the only solution to bring back the growth cycle. In June, the growth in eight core sectors dropped to a four-year low of 0.2 percent in June dragged by significant weakness across all major segments—steel, cement, electricity industries, refinery products. The May figure has been revised downwards to 4.3 percent from the earlier estimate of 5.1 percent. 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).

The demand slump is visible in the most depressing way in the auto sector and this has led to lakhs of job losses. Recently, industry body Federation of Automobile Dealers Association (FADA) said around two lakh jobs have been cut across automobile dealerships in India in the last three months as vehicle retailers resorted to cutting costs to deal with an unprecedented sales slump--as always, this is a natural consequence of a slowing economy.

A downturn first kills consumer demand and jobs. This has been happening in the automobile and component-making industries, FMCG companies, real estate deals, ad revenues in the media industry and corporate revenues even in other segments. 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. The current phase of economic slowdown was exacerbated with the funding crisis in the NBFC space. The IL&FS, DHFL episodes not only traumatised the financial system but also hit consumer confidence in a big way. The fact that the commercial banking system was already in stress with a large accumulation of NPAs added to consumer pessimism.

The critical point at this stage is to prepare a plan to give stimulus to the weak economy. Leading industry veterans have already warned the government about the state of the economy. The government should listen to expert opinion.

At the time of writing this piece, the BSE Sensex was trading down by more than 500 points. In the intra-day, it fell to over 700 points after the government revoked the controversial Article 370 that gave a special status to J&K; markets were worried about the political uncertainty and likely consequences. In response to US additional tariff imposition, China devalued yuan and it impacted the sharpest fall of rupee since 2013. The domestic currency fell by 113 paise to close at a five-month low of 70.73 on Monday. This development will, most certainly, occupy the media headlines in the next few days. But that shouldn’t divert the attention of the government from executing an urgent plan to breathe back life to a sliding economy. By far, this is the most critical issue the centre needs to deal with at this stage.

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Updated Date: Aug 06, 2019 09:35:00 IST