Tracking India’s economic slowdown: Between NITI Aayog chief’s warning and CEA’s tough talk lies real cure for economy; inaction will be disastrous

  • The government machinery typically plays down an unpleasant economic scenario fearing adverse public opinion

  • Private sector investors have lost trust in the economy

  • What is adding pain to the whole story is the fact that consumers are losing confidence to make purchases

Editor's note: This is the seventh and concluding part of a series in which Firstpost’s columnists analyse the ongoing economic slowdown and offer solutions.

By now, the fear that India’s economy is slowing and slowing at a real dangerous pace has been confirmed by hard data. No one who is looking at high-frequency macroeconomic numbers can have a different view about it. The government machinery typically plays down an unpleasant economic scenario fearing adverse public opinion. But this time, the government’s top economic think-tank seems to have woken up to the precarious state of the economy.

Rajiv Kumar, Vice Chairman of government’s think-tank NITI Aayog, has gone a step ahead to ring alarm bells. His point is simple. The economic crisis, at present, is worsening to an unprecedented level. Unless an ‘out of the ordinary’ economic resolution is brought forth urgently, the crisis can deepen claiming serious economic ramifications.

Here is what he said: “This is an unprecedented issue for the government of India. For the last 70 years, we have not faced this kind of liquidity situation. (The) entire financial sector is up in a churn and nobody is trusting anybody else… You may have to take steps that are out of the ordinary… I think the government must do whatever it can to take away some of the apprehensions of the private sector,” according to a PTI report quoting Rajiv Kumar from the Hero Mindmine Summit.

 Tracking India’s economic slowdown: Between NITI Aayog chief’s warning and CEA’s tough talk lies real cure for economy; inaction will be disastrous

Rajiv Kumar, vice chairman, NITI Aayog

To be sure, NITI Aayog’s warning to the government has come a bit late. It should have foreseen the scenario and advised the government well ahead of the crisis situation. For instance, Kumar spoke about the cash crunch in the financial system post-demonetisation. Why did it not identify the problem earlier and warn the government then?

Even at this stage, a public statement like this from the head of the government’s top think-tank will scare the financial markets further. It already has. On Thursday, benchmark index, Sensex plunged over 600 points to fall below the 37,000-mark in late afternoon trading. On Friday too, the markets declined by 345 points in the early session. But, it is better late than never.

Kumar’s words are true to the last word. Private sector investors have lost trust in the economy. They are sitting on cash but are not willing to put it on the table to fund projects. Private investments play a key role in any economy and no economy can thrive only on government spending alone. In the absence of private sector participation, India’s economic growth fell to 5.8 percent in the March quarter of 2018-19, the lowest in 20 quarters, thanks to a sharp slowdown in investment and manufacturing growth and contraction in agricultural production.

Stalled projects are piling up since funding has become scarce. India’s banking and NBFC sector are in a state of paralysis on account of a big buildup of stressed assets and severe liquidity crunch. They are in no position to lend large amounts to businesses.

Consumer losing trust

What is adding pain to the whole story is the fact that consumers are losing confidence to make purchases. Consumer confidence declined by 3.1 percentage points in August compared with July, according to the latest India Primary Consumer Sentiment Index (PCSI). The index by Thomson Reuters in partnership with Ipsos said that the downward movement in PCSI has been continuous since May 2019, barring a marginal (0.6 percentage point) improvement in July 2019.  Also, there is a sharp rise in the chunk of unsold residential real estate inventories.  Anarock, a Mumbai-based property consultant, estimates around 1.74 lakh homes in 220 projects across the top seven cities in the country are stalled with an estimated overall value of Rs 1.77 lakh crore.

Now let's take a look at the auto sector. Sales have been falling sharply for nearly nine months. In July 2019, sales of passenger vehicles to car dealers fell 30.9 percent to 2,00,790 units for the same period in July 2018,  according to data released by the Society of Indian Automobile Manufacturers (SIAM). That’s the steepest fall since December 2000 when it had declined by 35.22 percent. Commercial vehicles sales too fell 25.7 percent to 56,866 units, SIAM said.

All these figures tell us that the demand slump has impacted the economy seriously. When sales are slow and revenues are hit, it is bound to impact job generation and that is precisely what is happening now. Unemployment figures are at a 45-year high. Companies across most sectors are laying off employees. While automobile and component manufacturers are warning of around 10 lakh job cuts, even big consumer brands too, have sounded caution. Early this week, the country’s largest biscuit maker Parle Products said it may have to sack 8,000-10,000 staff if the consumption slump continues.

It is in this context that the NITI Aayog chief’s warning assumes significance. Surprisingly, chief economic advisor, Krishnamurthy Subramanian has ruled out any major stimulus package from the government. His rationale is that ‘profit is private and losses are public’, hence the private sector needs to find ways to tide over the downturn on its own. The Indian private sector, since liberalisation in 1991, has grown in size and the sector needs to find solutions of its own to tide over the demand lull, Subramanian said.

Theoretically, Subramanian has a point, but he is either undermining or is poorly advised about the extent of the present economic crisis. When sales are at a two-decade low and unemployment at four-decades high, it is a no-brainer that the government needs to work out a stimulus package to lend a helping hand to the private sector. A cut in GST rates for auto, FMCG companies and a package to boost the housing sector will help.

The contradictory statements from the NITI Aayog chief and the CEA on the likelihood of a stimulus package show that presently there is no consensus among the government’s top policymakers on this. Such a state of uncertainty within the government with respect to the future course of action does not augur well for a slowdown-gripped economy. The Narendra Modi government needs to urgently address the growing trust deficit among investors and consumers.

Read the other articles in the series here:

Part 1: Why Narendra Modi govt shouldn’t delay fiscal stimulus to revive struggling industries

Part 2: Country needs meaningful transition policies; simple demand and supply games won't do

Part 3: Narendra Modi govt has a herculean task ahead to pep up growth with dying private investment

Part 4: Path to revival will be slow, painful; govt must start work now

Part 5: Narendra Modi's $5 trillion goal is wishful thinking unless Rs 100 lakh cr infra puzzle is solved

Part 6: Get real, growth will follow; do not waste the crisis

Updated Date: Aug 23, 2019 13:52:16 IST