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Dealing With The Slowdown
We have to understand that while the slowdown in exports is due to global trade issues, the decrease in demand for automobiles is due to domestic reasons.
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The news of the economic slowdown in India has been flashing in the media for sometime though the gravity of the situation is yet to be ascertained. We understand that with India having had the distinction of being the fastest-growing economy of the world, any talk of a slowdown in the economy disturbs the sentiments. To make matters worse, Niti Aayog made an unsubstantiated statement about problems in the economy.
Notably, in its recent monetary policy review, the Reserve Bank of India (RBI) cut the growth target for FY 2019-20 from 7 per cent to 6.9 per cent. Tax receipts in FY 2018-19 fell short by nearly Rs 1.70 lakh crore. Naturally, this has also impacted government spending.
Slowdown a global phenomenon
Minister of Finance Nirmala Sitharaman, at a press conference on August 23, 2019, conceded that GDP growth would be lower than expected. However, she also categorically stated that the slowdown is a global phenomenon and not specific to India. In the US, GDP growth in the first quarter (January to March) this year was 3.1 per cent, and declined to 2.1 per cent in the second quarter (April to June). China’s growth rate too fell from 6.4 per cent in the first quarter to 6.2 per cent in the second quarter. The European Union growth rate receded from 0.4 per cent in the first quarter to 0.2 per cent in the second quarter. In today’s world, economies are not insulated from the rest of the world. The rising oil prices have stoked this slowdown, it is believed.
Dealing with a problem requires the right diagnosis at first. In this case, we need to identify sectors that are facing a slowdown. There are several parameters to judge the pace of an economy and its sectors. One such criterion is the demand for consumer goods. If we look at the sales figures of big FMCG companies, we find that Hindustan Lever grew 7 per cent during April-June. Marico 5 per cent, Dabur India 11 per cent, Colgate-Palmolive 4 per cent, Nestle 11 per cent, and Big Bazar 8 per cent. During the same period, bank loans grew 16.6 per cent. At the same time, demand for air conditioners grew 5 per cent, while for refrigerators 11 per cent. Any sensible analysis would not indicate a serious slowdown in the economy.
Trouble in the Automobile Sector
It is true that there has been a significant decline in the demand for automobiles. The fall is seen in both commercial and private vehicles. There was a decline in the demand for passenger vehicles in every month of the last quarter, and the trend continues in the first two months of the July-September quarter. For instance, sales of passenger vehicles fell 17.1 per cent, 20.6 per cent and 17.5 per cent during April, May and June, respectively. The demand for commercial vehicles dropped 6 per cent, 10 per cent and 12.3 per cent during April, May and June, respectively. We find a similar situation in three-wheelers and two-wheelers. As a result of increasing inventories in the automobile sector, production has started falling and manufacturing units have started laying off workers.
Is recession behind the auto sector’s woes?
We have to understand that while the slowdown in exports is due to global trade issues, the decrease in demand for automobiles is due to domestic factors. It’s definitely not due to recession. Crisis in the banking and financial sectors are behind the woes of the automobile sector. Significantly, India’s banking sector has been bogged down by NPA problems for sometime. As a result, banks have not been able to write loans to companies. On the other hand, NBFCs i.e. non-banking financial companies are also going through a liquidity crisis. Following the ILFS scam, the NBFC sector has come under severe stress. Not only the lending capacity of these companies has decreased, the banks too are reluctant to refinance them. So these companies that were giving loans to consumers in large numbers to buy durable goods, including automobiles, houses, etc., are now unable to serve them. The liquidity crunch has also impacted lending to small scale industries.
Recession in the economy is measured by demand — consumer demand, demand for homes, demand for vehicles, investment demand and government demand. However, basis the above-mentioned criteria, one cannot say that recession has set in the economy. If we look at the overall demand picture in the country, we will find that there has been some slowdown in demand, although it is not uniform across sectors. Although the demand for vehicles has actually decreased, consumer demand has not decreased, but its growth rate has definitely come down. If we look at the demand for housing, disbursal of housing loans by banks has accelerated and more loans are given for housing than before. If we look at investment, it is happening but the rate of capital formation has almost stagnated at 28-29 per cent and is much lower than the peak reached in 2010-11 at 36.5 per cent. Government spending is also not increasing due to extremely slow revenue growth.
What is the solution?
As usual, the corporate world is putting pressure on the government for a bailout package or stimulus. The auto sector is also demanding subsidy and tax exemptions. But due to the limitations of the public exchequer, this will not be the right step. The need of the hour is to increase the demand for durable consumer goods, houses, and vehicles. Banks can play a major role in this. Bank credit has been growing at a very slow pace for quite sometime. The central bank can help increase banks’ liquidity by the measures under its control. Although the repo rate has been reduced by 1.1 per cent in the last one year and it is likely to decrease further, banks are reluctant to pass on the benefit of lower interest to customers. Though there has been a decline in the repo rate, we needed a much bigger decline. By reducing interest rates further, we can increase all kinds of demand. On the other hand, to increase government expenditure, we need to increase revenue. Though increasing revenue may be a good thing, however, we have seen attempts to increase tax on foreign and domestic institutional investors not going well with these institutions and government had to rollback the same. The government even contemplated raising foreign loans through sovereign bonds, which may again pose huge risks. Under the current scenario of recession, if the government increases the fiscal deficit a little then there is no special danger. Therefore, many economists have been recommending increasing the fiscal deficit to achieve targets of government expenditure.
Government system needs to be streamlined
The government will also have to streamline its machinery. There is a significant amount of pending bills of SMEs, a huge amount of GST refunds is also pending, which are causing working capital woes for small and other industries. Clearing these dues by the government can significantly increase liquidity in the system.
Need to tax tech and e-commerce companies
Many foreign telecom, software and e-commerce companies are avoiding paying taxes by under-reportingtheir businesses in India, adopting unethical business models, doing deliberate cash burning and showing losses. For this, the government will have to streamline its systems so that legitimate revenues can be collected from these companies. Further, where the government is unable to tax under the rules, the principles of presumptive tax and minimum alternate tax can be adopted to tax errant companies.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.