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A Lingering Cold Wave

The new year has already brought sunshine, not just to the northern plains, but to some economic indicators that seemed to have caught a chill throughout 2019.

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Winter sprang on most of India like a stalking predator, suddenly from somewhere in the shadows, just as a balmy, sunny autumn seemed to linger on, way past the fall-end festival of lights. Somewhere it seemed to imitate the chill that had set into the economy, which too had arrived suddenly after a rosy spell, when economic growth reigned at around seven per cent. Then abruptly, the sanguinity of the moniker of the fastest growing large economy caught a chill and boom phase began to melt away for six straight quarters.

Independent agencies have pegged the third quarter growth in India’s gross domestic product (GDP) around 4.3 per cent and 4.5 per cent for the 2019-20 financial year. Shorn of jargon, the number points to a downswing in consumption and exports and thereby, manufacturing and investment in manufacturing or services. Consumption of electricity, a surefire indicator of economic activity plunged to (-) 12.2 per cent in October 2019 in comparison to the same month in 2018 and showed a paltry growth of 1.6 per cent between April and October 2019 over the same period in 2018. A pall seemed to have set in somewhere that seemed to only get deeper and deeper.

The index of industrial production (IIP) for October 2019 slipped to (-) 3.8 per cent over October 2018. Cumulatively the IIP for the April-October period grew by 0.5 per cent over the same spell in the previous year, with growth in the automotive sector slipping to (-) 16.9 per cent, fabricated metal products by (-) 14.4 per cent, and machinery and equipment by (-) 10.8 per cent. Not surprisingly, in the first seven months of 2019-20 the Indian government’s tax receipts fell way below the Rs 24.61 trillion target to Rs 10.52 trillion. Then on a misty Christmas Day, NDTV ran an interview with India’s former Chief Economic Advisor (CEA), Arvind Subramanian, where he expressed grave concern over the state of the economy, particularly the “savage credit crunch” and the “stressed” corporate sector. The conversation with New Delhi Television Co-founder and Executive Vice Chairman Prannoy Roy, ended on a rather bleak note. “We should mod-erate our expectations of short-term growth in India,” said Subramanian, who has now returned to the Peterson Institute for International Economics (PIIE) in Washington.

The television interview publi-cised a working paper of Harvard University’s Center for International Development that Subramanian has co-authored with J H Consulting Director Josh Felman. Titled ‘India’s Great Slowdown: What Happened? What’s the Way Out?’, the paper compares India’s economic down-turn with two previous crises the country has weathered in the early 1990s and then in the wake of the subprime mortgage calamity that swept the world after 2008.

Subramanian admitted though, that some macro-economic fundamentals like foreign exchange reserves and external debt were still strong, even as he expressed reservations about the official estimate of the fiscal deficit, which too is considerably lower than in the two previous spells of crises (please see tables). India has accumulated foreign exchange reserves of a whopping $406.66 billion over the last three decades, since July 1990, when the nation barely had forex to fund three weeks’ imports. At March end 2019, the country’s external commercial borrowings were $543 billion, or 19.7 per cent of the GDP. In 1991 that ratio had been 28.7 per cent.

A Bloomberg survey suggested at the end of December that India ranked among the top three preferred equity markets for foreign investors for the third time in a row. Overseas investors had ploughed in Rs 1 lakh crore ($14 billion) into Indian equities in 2019 and are expected to remain enthusiastic about Indian stocks in 2020 as well. So, why was the home-grown investor hiding away and why was that aspirational Indian consumer, whose craving for more had kept the GDP wheel turning over the last few decades, suddenly turned tight-fisted, as the deserted malls and shopping places seemed to suggest?

Subramanian and Felman trace the “trigger for the slowdown” to the collapse of the Rs 90,000 crore giant ILFS in September 2018, which then brought all non-banking financial companies (NBFCs) under the scanner. The NBFCs had lent heavily to realtors, who were stuck with huge inventories. The banks, which had lent to the NBFCs and were still struggling with the non-performing assets (NPAs) of companies that had gone belly up earlier, were obviously not gung-ho about taking on more risks, leading to the frightening credit crunch.

Arvind Virmani, also a former Chief Economic Advisor to the government of India attributes the slow-down to three factors. “A suppression of the Black economy without a commensurate increase in the White economy, institutional reform of the monetary credit system, which tightened monetary policy sharply and exposed hidden NPAs and tightening fiscal policy, which relied overly on sudden tax increases to balance the books. These triggered a financial crisis (IL&FS, NBFCs) and loss of confidence (Budget 2019-20) in the second half of FY19, leading to a sudden collapse of growth in FY20,” says Virmani, who is now chairman, Foundation For Economic Growth & Welfare and president, Forum for Strategic Initiative at Harvard University.

In her discourses with banks and industry, Union Finance Minister, Nirmala Sitharaman has attempted to allay apprehensions of the “Three C’s” − the Central Bureau of Investigation (CBI), Central Vigilance Commission (CVC) and the Comptroller and Auditor General of India (CAG). After entreating banks to “move” capital, the finance minister urged industry to unleash their “animal spirits”, in an allusion to Lord John Maynard Keynes.

“Investors are affected by the risk and return on investment, which was negatively affected,” concedes Virmani. He says the situation had remedied, though, “due to corrective action taken by government and expected in next six months.” The finance minister has already announced a massive cut in corporate taxes to incentivise investments and the central bank has trimmed its rates by 135 basis points across 2019.

Beyond the realm of numbers, stockpiles of unsold fast moving consumer goods at malls and shopping arcades tell of a consumer who had taken fright. “The economy needs a demand side boost badly,” muses Nilabja Ghosh, professor at the Institute of Economic Growth. “But it would be better if demand comes from the lower economic strata rather than from above,” she says.

“India has always depended on a balanced growth of private consumption and private investment. Any short term stimulus must be designed to improve medium term incentives for investment,” adds Virmani. “Private Consumption has already turned around in Q2 of FY20, and I expect this to continue in the rest of FY 20,” he says.

As if on cue, December 31 estimates showed that Goods and Services Tax (GST) collections had increased for the second consecutive month in 2019 and had shot up to Rs 1.03 lakh crore in December, a nine per cent rise over December 2018. And yes, the sun came out across the chilly plains of north India, at the dawn of the new decade!