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BW Businessworld

Recharge The Economy; Slowdown Threatens The $5 Trillion Vision

The recent auto slump in India is the worst in recent memory. The monthly automobile sales dipped 18.71 per cent in July, the worst in the last 19 years.

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The recent auto slump in India is the worst in recent memory.

The monthly automobile sales dipped 18.71 per cent in July, the worst in the last 19 years. This dip was most staggering in the passenger vehicles segment, with sales plummeting by 31 per cent to 2,00,000 units.

Last one heard of a similar slowdown was in December, 2000.

SIAM said, vehicles sales, across categories, was down to 18.25 lakh units in July, “down from 22.45 lakh units a year ago”.

This has had a cascading effect – plants have been shut, and widespread job losses, especially of contract workers, have been reported. A Reuters report said that as many as 350,000 workers may have been laid off since April.

Hero MotoCorp, Mahindra & Mahindra, Tata Motors, Bosch, Sundaram Clayton, among others, have shut their facilities for some time, due to the slowdown. The auto industry employs 35 million people directly and indirectly, which translates into about half of India’s manufacturing output.

Auto Down Across The World

But then auto has been on a downward spiral the world over.

Whether it’s the US, or Germany, or China, auto sales are down.

A report put out by Germany’s Center for Automotive Research (CAR) says that the world car market sales will dip by “more than 4 million” in 2019.

CAR director Ferdinand Dudenhoeffer has said that the downturn, “worst since the financial crisis of 2008, could last for four years”, with the enforced introduction of electric vehicles being a contributing factor in Europe, apart from, of course, President Trump’s trade wars, and a drastic fall in China sales. Many German car majors have reported a drastic fall in China numbers.

This EV thread rings a bell here, too.

In India, the government has enforced the BS VI norms (by 2020), soon followed by the EV push.

These disruptions have an economic cost, too.

Of course, Prime Minister Narendra Modi said in a recent interview that ICE vehicles and E vehicles can co-exist – something that has been welcomed by the industry, but EVs will come sooner than later.

“Of course, this is the worst slump in recent memory. This may last for a few months,” says R C Bhargava, Chairman, Maruti, speaking to BW Bsuinessworld.

“I won’t buy the alarmist view that the economy is collapsing. But we need to ensure that during periods of slowdowns, we shouldn’t increase prices and burden the customers. Yet, we find that many state governments have increased road tax. They miss the national picture,” adds Bhargava.

Bhargava may be optimistic, but there are tell-tale signs that have sent shockwaves through India Inc.

Sample what Britannia MD Varun Berry has to say. “Even for a Rs 5 product, if the consumer is thinking twice before buying it, then there is some serious issue in the economy,” Berry has been quoted as saying. He tells BW Businessworld that market growth “has halved”.

It’s another matter that mainland India may still not be debating the slowdown that is here to stay.

A survey commissioned by BW Businessworld, in association with Havish M Consulting, which spoke to 5,000 people across 12 centres in India, finds that 50 per cent of the respondents don’t know yet that a slowdown is here.

The India Slowdown
Probably sensing this national challenge, West Bengal Finance Minister Amit Mitra recently called for “taking the economic slowdown centrestage – something that would make the Union government accountable”.

While giving this call, Mitra listed some national economic indicators –

In the April-June 2019 period, new projects announced were 87 per cent less than the corresponding period last year.

While capital goods sector grew 9.7 per cent in June 2018, this year, it contracted 6.5 per cent in the same period.

IIP was 1.2 per cent in June 2019, while it was 6.9 per cent in the same period last year.

The manufacturing sector grew by 1.2 per cent in June 2019, way lower than 6.9 per cent last year June.

Above all, in the January-March period, GDP growth was the lowest in five years at 5.8 per cent.

The figures, but of course, tell us that a slowdown is here for real.

The only solace that India can draw is that large parts of the world are also in economic turmoil.

Global Effect or India-Specific
“I would say that it’s part of a global phenomenon. Even the IMF has brought down its estimate of global growth from 3.6 to 3.2 per cent. We are beginning to see a substantial slowdown in European region as also in Japan. The measures that President Trump took for growth in the US have started to wear off. In our case, the slowdown is more marked than others because of the uncertainty caused before the elections and the lingering impact of the problems in the financial sector,” says Niti Aayog Vice Chairman Rajiv Kumar, when quizzed by BW Businessworld.

Former Chief Economic Advisor to the government, Arvind Virmani, doesn’t quite agree. He tells BW Businessworld: “Post-2008 financial crisis, I had said that India is a domestically-oriented, rather than an export-oriented country. The situation remains, by and large, the same and India remains a domestic demand driven economy”.

Former RBI governor Bimal Jalan continues in the same breath: “Globally, there may be Brexit, there may be US-China tensions, there may be problems in the EU, but we are not that dependent on the global economy. It (the slowdown) appears to be cyclical and, in part due to demonetisation.”

While exports are the major component of economic activities of countries like Germany and China, India is much like the US – insulated against economic upheavals globally.

But some warn against drawing hasty conclusions.

Like Dalmia Group Holdings Chairman Gaurav Dalmia says: “How do you reconcile the worst auto crisis in recent history with the rising mutual funds collections? Also, how do you reconcile the rising wages and a negative growth in advertising?”

Author-columnist Vivek Kaul, writing in Mint, recently said, “How does one explain the fact that housing loans are growing and so is the number of unsold homes?”

Others are more forthright. Says Godrej group chairman Adi Godrej, talking to BW Businessworld: “Many sectors are not doing well. The government has also introduced some bizarre measures like imprisonment for CSR violations. A fiscal stimulus would be most welcome”.

The US-China trade war, and the impending global recession, is not going to make things easier for India.

Forty-six per cent of India feels that we are not ready for a US-China trade war, finds the BW survey, quoted earlier. A slightly higher number – 48 per cent of Corporate India also feels that we may not be ready for such a scenario. BW along with Havish M Consulting also reached out to 500 corporate leaders across eight centres in the country.

The Roots Of The Crisis
The auto crisis as also the slowdown in sectors like real estate and construction have their genesis in the NBFC logjam.

The IL&FS was the tipping point. Post-IL&FS, NBFCs found it difficult to borrow from banks, and since they largely financed the auto sector, the sector was badly hit.

Demonetisation and an imperfect GST rollout compounded the woes – so, while the formal economy did grow at around 7 per cent, the informal economy contracted substantially.

Sixty per cent of respondents in the BW nation survey quoted earlier were convinced that demonetisation and an imperfect GST rollout led to a contraction of the informal economy. As per the Corporate India survey, quoted earlier, fifty per cent were of a similar opinion.

Many feel it was a deep-rooted malaise waiting to explode.

Says Niti’s Rajiv Kumar: “This crisis has its roots in the 2005-11 period, when banking credit grew enormously and that led to the emergence of NPAs and then banks were in no position to lend. This role was then played by the NBFCs and their assets grew at a fast pace. Some of this resulted in serious asset-liability mismatches as seen in the case of IL&FS collapse”.

Adds Virmani: “In the 2010-13 period, the current account deficit over 4 per cent. It was almost like a Balance of Payment crisis. In the post-2014 period, there have been welcome systemic corrections, though there was a problem with two RBI Governors trying to superimpose the Chicago school of monetary policies on India”.

Financial Sector Reforms
Almost all stakeholders agree on the need for urgent financial sector reforms.

Speaking on the subject, Uday Kotak recently said the government should reintroduce the Financial Resolution and Deposit Insurance (FRDI) Bill. “Time has come for a strong FRDI Bill along with a strong resolution mechanism for handling stress and mortality in the financial sector,” he said.

He also said that legislative changes should be made to bring down state ownership in public sector banks below 50 per cent.

Delivering the 25th Lalit Doshi memorial lecture recently, he laid a broad roadmap for financial sector reforms.

He said public sector banks’ numbers should be capped at five. Public private partnerships could be explored in banking, he added. He elaborated: “Under the public private partnership model, the state ownership has to be capped at 26 or 33 per cent, with the private sector partner owning the test”.

In bank recapitalisation, efficient banks should get more capital.

There have also been calls for RBI-mandated ratings for NBFCs.

Questions have also been raised on why there are so few private sector banks in the country. In the last few years, only two private sector bank licences have been given.

Needed: Long Term Reforms
While financial reforms are a must, there also need to be other structural reforms, in addition to a stimulus, to kickstart the economy are realise the $ 5 trillion vision by 2024.

Says Marico Chairman Harsh Mariwala: “We need to address structural issues. We need to address land laws, labour laws, cost of capital, and ease of doing business”.

Apart from simplifying GST, tax reforms are crucial.

“We were discussing the Direct Tax Code (DTC) way back in 2009 (when I was with the government). Ten years down the line, we don’t have even a proposal DTC proposal. It’s imperative that we have one at the earliest,” says Virmani.

He also seconds Arvind Panagariya’s proposal for coastal export zones to attract supply chains from China.

Among other long-term measures, agriculture needs to be reformed.

The Narendra Modi government has the political capital and time to undertake these reforms.

Modi, in a way, will have to correct the impression that the government is not adequately addressing the issue. Half of the respondents in the BW nation survey, quoted earlier, think that the government is “not adequately addressing the slowdown concerns, because it has done exceedingly well on its nationalist plank”.

Out of The Box Thinking?
BJP MP Subramanian Swamy, a Ph D in economics, talking to BW Businessworld says that he saw the slowdown coming way back in 2015, and in fact documented it in a newspaper op-ed.

Swamy’s new book “Reset” will be out in September where he lists some of his favourite themes like the abolition of income tax, reduction of interest rates, hiking of fixed deposit interest rates, among others to argue how “India can grow at 10 per cent per annum”.

“The basic problem is that there are not many people around trained in mathematical economics,” he says.

While his followers – and they are a legion – have long rooted for him to be Modi’s Finance Minister, is Swamy a voice that Modi needs to listen to, in this challenging period?

The $ 5 Trillion Economy Vision
With a slowdown and no immediate respite in sight, is the Modi government’s $ 5 trillion vision realistic?

Swamy says that it appears that “no one has done their math”. According to him, this will require us to grow at 16 per cent, which is next to impossible.

The two surveys quoted earlier seem to support this view. Forty four per cent of Corporate India say this is an unrealistic target, and only half of the figure say this is an achievable target. On the other hand, 48 per cent of India feel this would be difficult to achieve, while 20 per cent feel the opposite.

Niti’s Rajiv Kumar rubbishes this assessment. He says: “The estimate of 14 to 16 per cent is wrong. What we need is some 8.5 per cent in real terms and add inflation to that, say, about, 4 per cent which means 12 to 12.5 per cent. We need to reverse the slowdown to reach there in the remaining five years. I am confident that we will be able to do it with the government giving it the attention it deserves”.

Adds Chief Economic Advisor Krishnamurthy Subramanian: “In the first 55 years since independence, the Indian economy grew by about $1 trillion. Assuming an average exchange rate of Rs. 20 per dollar during that period, that translates into an increase of about Rs. 20 lakh crores in the first 55 years. From 2014 to 2019, the economy grew from about $1.7 trillion to $2.7 trillion. At an average exchange rate of Rs. 65 per dollar during this period, the $1 trillion increase translates approximately to about Rs. 65 lakh crores in the last 5 years. If the Indian economy can grow about three times more in the last 5 years than it did during the first 55 years, and that too from a higher base, there is no reason why we cannot grow at about 8% in real times to reach our goal of $5 trillion by 2024”.

The Modi government’s stimulus package to reignite the economy may just be the first step towards realising that $ 5 trillion India vision.

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