A Made-in-India Economic Slowdown

While the news in and out of India in recent days has been, quite rightly, hogged by the Kashmir issue, I would like to draw your attention to the economic slowdown in India.

There probably isn’t a soul anywhere in the world who hasn’t heard of Prime Minister Narendra Modi’s invitation to foreign investors, “Make in India”. Such is the power of his PR machinery. I am certain even he didn’t realise then, that ever since his government took over for its first term in 2014, it would only usher in a period of slower growth.

The made-in-India economic slowdown isn’t new. It actually began in 2015 and then accelerated thanks to the harebrained idea of demonetization implemented in the latter half of FY 2017. This, coupled with the long-overdue GST (Good and Simple Tax, Mr Modi would have you believe, when it is anything but simple) have disrupted the growth cycle and what was initially considered a mere blip in the GDP radar is now here to stay.

The government is at its wit’s end trying to revive growth, but as expected, is avoiding all the hard decisions to do with structural reforms. The Indian Economic Survey as well as the budget suggest a neo-liberal outlook, hoping that the reduction of corporate taxes alone will boost private investment. The new, more pliant RBI too is obliging, hoping that merely cutting interest rates will revive growth, if not on the investment side, then at least on the demand side.

Corporate earnings and the previous quarter’s GDP growth of 5.8% have raised alarm bells. Revenue growth for most companies was flat last quarter and this one, and so is the outlook.

If anything, this corporate earnings season and the the last quarter’s GDP growth of 5.8% have raised alarm bells. Revenue growth for most companies was flat last quarter and this one, and so is the outlook. Automobile manufacturers have seen several quarters of falling sales and now even FMCG companies are reporting that the robust rural demand seen earlier is now weakening. What does one expect with falling farmers’ incomes, rising unemployment and small businesses downing shutters?!

What’s worse is that there is no revival in investment, save for some stalled projects, according to CMIE (Centre for Monitoring the Indian Economy). Quarterly Capex Aggregates for new projects were at Rs. 2.3 trillion in September 2018 and are down to a mere Rs. 0.4 trillion in June 2019. The demand for corporate credit itself is down. If borrowings of non-finance companies in India were growing at 29.5% in 2008-9, they grew at 3.7% in 2017-18. You can be sure that in the past two years, it would have only slowed further.

Unemployment according to CMIE is at 8% and an important feature of employment, especially in manufacturing is that the use of contract labour is rising and is at 36% currently. Urban unemployment is at a three-year high of 10.3%. The core sector growth for the month of June (which covers 8 core industries such as steel, cement, oil and gas, fertilizer, etc.) announced earlier this month is the lowest in four years at 0.2%, and the average for January-June 2019 is also considerably lower. Since it has a significant weightage in the industrial production figures, the IIP (Index of Industrial Production) for June and for the first quarter have also come in lower than last year, at 2% and 3.6% respectively, compared to 7% and 5.1% the previous year. Therefore, I think we can expect a lower Q1 GDP at the end of this month.

According to CMIE, Quarterly Capex Aggregates for new projects were at Rs. 2.3 trillion in September 2018 and are down to a mere Rs. 0.4 trillion in June 2019.

Meanwhile, the flow of bank credit to the corporate sector is much lower and tighter, what with demand for credit itself falling. The resolution of Indian banks’ gargantuan bad loans problem moves at a glacial pace, with the government itself asking for dilution of the new IBC rules and expansion of credit to small businesses (over which the former RBI governor resigned). If you, like the government, think that bank credit to boost demand can be raised, you are not following how much retail credit has been growing. For several years after the banks’ bad loans problem came to light, retail credit is what banks have relied on, in order to grow. However, that glimmer of hope is dimming as well, with the latest news reporting that banks’ retail credit growth is now down to 7.3% in the first half of this year, trending down from 8.5% in 2015. I remember reading news reports about retail credit growing at 10-11%, when banks’ bad corporate debt first began to eat into their earnings over five to six years ago.

You have to ask why underlying growth (not just headline GDP figures) continues to be dismal all these years. As I had written earlier, the lack of structural reforms, banks’ bad loans as well as the base effect of the post-demonetisation spurt wearing off are the main culprits. Exports too are down, but then India was never an export-dependent economy to begin with. Just as well, you might think, because we are to some extent insulated from the global slowdown that is taking place – thanks to the trade wars between US and China – since we are not part of the global supply chains that are affecting many east Asian economies adversely.

So, if you hear the government view that we are slowing down due to global reasons, as they are bound to say, you know that is just simply not the case. While we are linked through the capital markets and financial flows do affect us, our links through trade are more limited. On the contrary, you could argue that with the ongoing trade wars, more foreign investment ought to have flowed to India. Sadly, they are not, heading for Vietnam and other countries instead. If anything, our stock markets have seen a massive net outflow of foreign portfolio investment of Rs. 44,500 crores in 2018-19, largely in response to the US Federal Reserve raising interest rates. And after a few good months of inflows early this year, foreign investors are once again pulling out tens of thousands of crores from India, this time disappointed by tax announcements in the new budget.

Of course, we know that foreign capital flows are volatile, as we have witnessed through the international financial crisis when easy money came flooding into many emerging markets, including India. Which is why we need more long-term, job-creating kind of foreign investments in the country. Unfortunately, while our government keeps crowing about the record FDI investments India attracts, the fact is that very little of it is the kind that we need. India ought to be an investment destination, for the size of its domestic market and growth potential, not as an export base the way China and many east-Asian countries are. In that sense, I would say we are a very different kind of economy and we should be playing to our advantages, which we are clearly not doing. We must remember that many multinational companies continue to be in China, not just for low-cost contract manufacturing, but because of the size of its domestic market.

Lack of structural reforms, banks’ bad loans as well as the base effect of the post-demonetisation spurt wearing off are the main culprits for the made-in-India economic slowdown.

The million-dollar question, of course, is why would foreign companies invest, when domestic investment is barely growing. According to CMIE, the returns on investment for India Inc have been dwindling and that is another reason for concern. At the end of the day, our economic woes right now, are home-grown. Unless we tackle the stressed sectors of the economy that desperately need structural reforms, such as agriculture, bank and NBFC credit and developing a debt market, as well as infrastructure, we are not going to be able to gear ourselves for the next level of growth. The government talks of moving the economy from informal to formal (one of the many reasons cited for demonetization), when evidence is of rising informal employment with companies preferring to hire contract labour. The government offers farmers income support without solving the underlying problem of agriculture itself not being gainful employment anymore. The government wants lower interest rates to boost demand, when it hasn’t quite resolved the banking and NBFC crisis. To compound problems, our household savings rate, which is the backbone of the Indian banking system, has fallen to all-time lows.

And so, we will muddle on in this fashion, seeing our economy grind to a halt. In a matter of five years, we have seen the Indian economy halting and faltering in slow motion, despite the government’s efforts to gin up the numbers which were akin to a great Indian rope trick. Nothing, however, prevented the Indian voter from voting this government back to power with an even bigger majority.

Meanwhile, of course, with a slowing economy what better way to divert attention from the really pressing issues than to clampdown in Kashmir in the most undemocratic and heavy-handed fashion possible. Having scrapped Article 370, the government can now bask in the glory of having met its election promise. The only one perhaps, never mind that it’s not going to help people find jobs or get investment going. The government is also making up for the inaction on economic reforms by hurrying through a slew of legislation in parliament in its first few days in office, in order to give people the impression that this government is effective and means business.

A further slide is on the cards, the Indian rope trick notwithstanding. But, not to worry, the PM’s PR machine is working overtime. Many would have had the pleasure of watching the Prime Minister out in the wilderness (quite literally!) in Man v Wild recently on Discovery Channel. Looks as though we will be waiting many years more for the promised Achhe Din or “Good Days” to arrive.