Tracking India's economic slowdown: Narendra Modi govt has a herculean task ahead to pep up growth with dying private investment

Editor’s note: This is the third part of a series in which Firstpost’s columnists analyse the ongoing economic slowdown and offer solutions. Over the last few weeks, there has been a spurt of news articles on the economic slowdown. Car sales are down . Two-wheeler sales are down. Even mopeds are not selling as much as they did. The volume growth, or the number of packs sold, of Fast-Moving Consumer Goods (FMCG) companies has slowed down big time . New investment projects are barely being announced and there has been a huge drop in the projects being completed. Exports are stagnant and the government’s collection of taxes have been more or less flat. There is more than enough evidence of the economy slowing down. In fact, as this news report points out, people are thinking twice even before buying a Rs 5 biscuit pack. The question is why. Let’s take a look at this pointwise. 1) The Gross Domestic Product (GDP) of an economy consists of four parts: Private consumption expenditure, investment, government expenditure and net exports (exports minus imports). In the Indian case, private consumption expenditure makes up 60 percent of the economy. In the last few years, the investment part of the economy hasn’t gone anywhere and it is consumption which has been driving the economy. Now consumption is slowing down. 2) Why is consumption slowing down? Between April 2014 and March 2019, the retail loans of banks went up by 120 percent. Between April 2009 and March 2014, the five-year period before the period under consideration, the retail loans of banks had grown by 80 percent, on a much lower base. [caption id=“attachment_4296889” align=“alignleft” width=“380”] Representational image. Reuters[/caption] Between April 2014 and March 2019, credit card outstanding went up by 204 percent whereas personal loans went up by 255 percent. What this tells us is that borrowing financed a large part of consumption, over the last five years. Why did this happen? This happened primarily because the income in the last five years hasn’t gone up as much as it did in the period of five years before that. The per capita income between April 2014 and March 2019 went up by 59 percent. It had gone up by 88 percent between April 2009 and March 2014. With this fall in the rate of growth of income, people borrowed more to consume and spend more. 3) Banks were not the only financial institutions giving retail loans. So, were the non-banking finance companies (NBFCs). Post-demonetisation in November 2016, banks had seen a huge increase in their deposits. Given that the banks were paying interest on these deposits, they needed to lend it out as well. They were not in a mood to lend to the industry, given the massive amount of bad loans they had accumulated on lending to industry. Bad loans are largely loans which haven’t been repaid in 90 days or more. What they did instead was started lending big time to the NBFCs. Between March 2017 and March 2019, the banks lending to the NBFCs increased 64 percent to Rs 6.4 lakh crore. This easy lending by banks further encouraged the NBFCs to go easy on retail lending. Between March 2017 and March 2018, retail lending of the NBFCs jumped 39 percent to Rs 3.6 lakh crore. 4) The overall financial liabilities of the households went up by Rs 6.7 lakh crore in 2017-2018. This is a huge number. 5) In the recent past, several NBFCs have been in more than a spot of bother. This has led to the banks cutting down on their lending to the NBFCs. Between March 2019 and June 2019, bank lending to the NBFCs shrunk close to 1 percent. Banks are a major source of funds for the NBFCs. The Reserve Bank of India (RBI) data for the NBFCs for 2018-2019 is not currently available. But data put out by the credit bureau, CRIF High Mark, suggests that during 2018-2019, loans given by the NBFCs have fallen by 31 percent. 6) What about retail lending carried out by banks? Between March 2019 and June 2019, the retail lending carried out by banks increased by just 1.5 percent. If we look at the year-on-year growth in retail loans between June 2018 and June 2019, it remains strong at 16.6 percent. But the growth of just 1.5 percent between March and June this year tells us that the bulk of the growth in retail loans happened between June 2018 and March 2019 and things have slowed down since. This tells us that people are becoming averse to the idea of taking on new loans to finance consumption. This was bound to happen at some point of time given that the income hasn’t been increasing at the same pace as it was in the past. Borrowing can finance only so much of consumption growth and in the process of economic growth. 7) There is another point that needs to be made here, which is not very obvious in the first place. In much of the western world, the thinking is that in an economic slowdown it is best to cut interest rates and let people borrow and spend more. This logic does not apply very well to countries like India. When it comes to a certain section of the population, they tend to consume more when interest rates are high. Take the elderly. When they earn a higher rate of interest on their deposits, they tend to consume more. Post-demonetisation interest rates have fallen and this clearly has had an impact on their consumption. What has not helped is that hospital and medicine inflation in 2018-2019, two figures very important for the elderly, were at 9.4 percent and 7.2 percent respectively. 8) A great success of the Narendra Modi government has been the ability to maintain low food inflation. The food inflation in 2018-2019 was just 0.14 percent. This basically means on the whole, food prices were flat. While this was good news for consumers, it wasn’t good news for farmers.

A major reason for flat food prices is that when it comes to many agricultural commodities, India as a country is producing more than it consumes. At the same, this excess produce is not being exported and hence, has led to stagnant food prices.

Stagnant food prices have meant flat incomes in large parts of rural India and this has now started to impact consumption. Ultimately, consumption on its own cannot keep creating economic growth all the time. For that to happen, incomes need to keep going up at a good pace as well. For incomes to go up, there has to be economic activity and for that investment and industry need to progress. (The writer is an economist and author of the Easy Money trilogy) Read 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