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Is it Economy Crisis in India?

India's GDP growth slowed to 4.5% in the July-September quarter, the weakest pace in more than six years, as consumer demand, private investment and exports all weakened. The output of eight core infrastructure industries contracted by 5.8% in October, indicating that even the current quarter may produce gloomy results. Long before he became everything to everyone, Narendra Modi was seen as the future savior of the Indian economy. The time to fulfill the original purpose is now


What are the latest numbers?

The growth rate of the Indian economy in the July-September quarter slowed down to 4.5%, the lowest in 25 quarters, from 5% in the preceding quarter as manufacturing output contracted.

During the second quarter, only government expenditure supported growth by growing at 11.6%, while financial services sector grew 5.8%. The growth rate dropping below the 5% mark is a culmination of several months of downbeat figures, from plunging car sales to shrinking factory output and an export slump.
This marks the sixth straight fall in quarterly Gross Domestic Product (GDP) growth and also the first time in almost seven years that it has fallen below the psychologically important 5% mark. The previous low was recorded at 4.3 per cent in the January-March period of 2012-13. The GDP growth was registered at 7 per cent in the corresponding quarter of 2018-19.

The ‘Agriculture, Forestry and Fishing’ sector grew by 2.1 percent as compared to growth of 4.9 percent in the same quarter last year (Q2 2018-19). ‘Mining and Quarrying’ grew by 0.1 percent as compared to growth of -2.2 percent in Q2 2018-19. The worst numbers come from manufacturing, which shrank by 1.0 percent as compared to growth of 6.9 percent in the same quarter in 2018-19. ‘Construction’ grew by 3.3 percent as compared to growth of 8.5 percent last year.

Private Final Consumption Expenditure (PFCE) grew at 5.1 percent during the last quarter (Q2 of 2019-20) as compared to 9.8 percent respectively during Q2 of 2018-19. Gross Fixed Capital Formation (GFCF) shrunk by 3.0 percent during Q2 of 2019-20 as compared 11.8 percent during Q2 of 2018-19. It’s the government that saved the quarter. Government Final Consumption Expenditure grew at 15.6 percent during Q2 of 2019-20.

Note:
The Private Final Consumption Expenditure (PFCE) is defined as the expenditure incurred on final consumption of goods and services by the resident households and non-profit institutions serving households.

Gross Fixed Capital Formation (GFCF) is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, minus disposals.


Why is this fall worrying for India?

The fall in the GDP growth rate, which is indicative of further deepening of economic downturn in Asia’s third largest economy will likely ratchet up the demand for a fiscal stimulus from the government. The persistent slowdown may also force the central bank to go for another round of interest rate cuts on December 5 in its monetary policy review. But that will not be enough.
Prime Minister Narendra Modi’s government has taken several steps to boost investment and bolster economic growth, including cutting corporate taxes in September, while the central bank has cut interest rate five times this year. But some surveys show business confidence is at multi-year lows.
Separately, data released by the industry department showed the eight infrastructure sectors represented by the core sector data contracted for the second consecutive month by 5.8% in October, signaling the worst for the Indian is not be over yet. In September, these core sectors had shrunk by 5.1%. During the month, six out of the eight infra sectors contracted except refinery products and fertilizers. Output of coal (-17.6%) and electricity (-12.4%) fell by double digits.

The Narendra Modi administration has taken a series of steps to reverse the growth slowdown, including a cut in the corporate tax rate in September to 22% from 30% earlier for companies not availing themselves of any tax breaks, and to 15% from 25% for new manufacturers. The cabinet cleared a proposal last week to set up a ₹25,000 crore debt fund to complete stalled housing projects, a move expected to boost cement and steel sectors in the months ahead.

As mentioned in the earlier section, it’s the government expenditure that kept the GDP growth rate comfortably above 4 percent. But it came with a cost. India's fiscal deficit in the first seven months through October stood at ₹7.2 trillion, or 102.4% of the budgeted target for the current fiscal year. This means that the government’s ability to spend its way out of the slowdown is severely limited now.
The worst trend is the contraction of the manufacturing sector, which was the only hope for the unemployed youth of the nation.


When will the impact of this slowdown be felt?
Declining consumption at home, troubled banks and a gloomy global outlook are being blamed for the slowdown, prompting a flurry of measures from the government. At risk are efforts to reduce poverty in Asia’s third-largest economy and the ability to generate jobs for the more than 10 million (1 crore) young people entering the workforce each year.

The economy is expanding well below the average 7%-8% quarterly pace seen in the past few years. Economists have been steadily downgrading their growth forecasts for the current fiscal year through March 2020, with the median estimate in a Bloomberg survey now at 5.6%, down from 6% in October. The central bank’s most recent forecast is for growth of 6.1% this fiscal year. That number now appears optimistic.

If Prime Minister Modi wants to make his pledge to turn the country into a $5 trillion economy by 2024, from $2.7 trillion now, India needs its economy to expand at a 9%-10% pace for a sustained period of time. With growth slowing for the past six straight quarters, and little sign of a sharp rebound, that’s a setback for efforts to fix the extreme income gap.
In a country of 1.3 billion people, India’s per capita income is about $2,000 a year - dwarfed by China’s $9,800 and the U.S.’s $62,600. So while 5%-plus expansion might look good on paper, India needs faster growth just to catch up with other Asian countries such as Indonesia, where per capita income is at $3,900, and South Korea’s $31,000.

The impact is already being felt, though the government wouldn’t accept it for the fear of political fallouts

The economy has been shedding jobs, lenders and crisis-hit shadow banks have curbed loans and farmers’ incomes have been subdued. The jobless rate jumped to a 45-year high of 6.1% in 2018 and anecdotal evidence suggests that there’s more pain to come as the struggling auto sector - which makes up almost half of India’s manufacturing sector - continues to cut jobs. The slide in consumer spending and plunge in auto sales mean overall manufacturing, which contributes about a fifth to the economy, is barely growing or even contracting, and businesses are curbing investment.

Banks have been cautious about lending in the past few years as they grapple with non-performing loans and their withdrawal from the market had seen so-called shadow banks emerge. In the past year, these non-bank lenders have been facing their own troubles following a default by one of the biggest institutions, IL&FS Ltd., which set off a liquidity crisis. Shadow lenders fund everyone from small-time entrepreneurs seeking startup funds to property tycoons looking to roll over debt, and when they curbed loans, consumer spending started to tail off.

Reserve Bank of India (RBI) Governor Shaktikanta Das says the slowdown is cyclical, which means business activity will pick up when the cycle turns. He’s cut interest rates five times this year to help cushion the economy and pumped liquidity into markets, but says the government also needs to fix structural weaknesses, like making it easier to do business in India. The government has announced a slew of measures, including $20 billion in tax cuts to companies, but most economists say the outlook is gloomy even though there may be some recovery later this fiscal year.
Nobody is sure if the worst is over yet, or if the economy is inching towards the 4% growth rate mark.


Where is the real problem?
In February, with the general elections just three months away, Prime Minister Narendra Modi appeared at the “Rising India” summit organised by media house News18 and took on critics who had accused his government of failing to deliver on promises to create millions of jobs. “Is it possible that with India growing at record rates, there are no jobs in the country?” he asked.
It’s possible. It was happening when the economy was growing at ‘record’ rates. It will happen even more when it’s growing slowly. India’s economic growth has moved from not just being a jobless regime but to being a ‘job-loss’ one, suggests new research. In a study published in the Economic and Political Weekly, K.P. Kannan and G. Raveendran break down the latest Periodic Labour Force Survey (PLFS) findings to suggest that the Indian economy is losing its ability to absorb new entrants to the work-force with less-educated rural women suffering the most.
The results of the recent National Sample Survey (NSS) on employment and unemployment called the PLFS 2017–18 should have come as a shocker to all those managing the Indian economy. Instead, it started with stern denials, from both official and non-official quarters. The sum and substance of the results is that not only has there been an unprecedented increase in the unemployment rate but that it has been accompanied by a fall in the absolute number of workers compared to the previous survey in 2011–12. However, there were some forewarnings.

In 2004-05, 58% of the population entering the workforce in the previous two decades was absorbed into the workforce but by 2011-12 this figure had fallen to 15% in 2011-12. In 2017-18, this figure turned negative (-5%) suggesting that some of the working-age population actually left the workforce. And all this has happened even while India recorded positive aggregate growth.
They estimate that the economy lost 6.2 million jobs between 2011-12 and 2017-18. Breaking down jobs by location, gender, education and sectors, they find that it was mostly the less educated (below secondary level) who lost jobs. Within this cohort, it was rural women who suffered the most (rural women's employment fell by 24.7 million).


Sectoral analysis of the data shows that the net job loss stems from losses in sectors such as agriculture, quarrying, mining and manufacturing. Taken together, job losses in these sectors accounted for 95% of the total job loss. According to the authors, this jobs crisis is a result of several structural and policy failures in agriculture, rural-to-urban migration and education.


Who must now make up their mind?
Throughout its four-decade-long history, India’s ruling Bharatiya Janata Party (BJP) has always been divided between two viewpoints on economics: the free market model that embraces globalisation and is private capital-oriented, or the more indigenous, protectionist system with a significant welfare component.

In the years the BJP ruled India in the late 1990s, and beginning in 2014, the party has been wrestling with whether it should make the role of the state more prominent, or that of business; and within business, should it open the doors to the world or focus on promoting — and protecting — domestic businesses?
From the time Modi rose to prominence in the early 2000s as chief minister of Gujarat, the prime minister has been noted for his affinity towards promoting business and entrepreneurship; he himself has reiterated such inclination on different occasions. Indeed, under his leadership, Gujarat’s economy grew at a faster pace than the national average for more than a decade.
During that time, Gujarat also transformed from a power-deficit to a power-surplus state, and managed the difficult task of achieving growth in agriculture while reducing its share in the state gross domestic product. This is particularly significant because Indian agriculture has for long been plagued with low productivity, and while it employs vast numbers of people, often such participation in farm labour is due to the lack of alternative better-paying professional opportunities.

The movement of excess farm labour to manufacturing and services remains one of India’s key challenges. Gujarat, therefore, became a model for “freeing up space for private initiative and enterprise and the creation of an enabling environment by the State.” Shortly before Modi became prime minister in 2014, the Ministry of Commerce and Industry noted in a report that Gujarat’s land acquisition system for business under the then chief minister Modi was the best in the country.

Modi’s rise to power as prime minister in 2014 came with great expectations of a slew of economic reforms. The government has brought several significant changes in the economic environment — including introducing a transformational bankruptcy law and pushing through the long-awaited Goods and Services Tax (GST).
Certain key reforms, however, remain pending including, critically, a game-changing land reform law. Some early signs of building consensus for land reform were stalled early in his first term as prime minister following criticisms by the opposition that the government’s proposal was anti-poor. The other critical, and long-pending, task of labour reform is also impeded and is unlikely to see the light of day anytime soon.
It’s clear that the Gujarat model didn’t work out for the rest of India. One of the problems with the Gujarat model is that it’s not much of a model. It is an attitude, a leadership style, even an ideology. In its enthusiasm for private investment and its approval of market forces, the Gujarat Model differs only in degree from the stated policies of the previous Congress-led government. Nationalism and globalization, protectionism and free markets don’t go together - but this Modi knew already. If it were electoral compulsions that drove him away from genuine reforms, he must remember what Bill Clinton said in his election campaign in 1992: It's the economy, stupid.


How can the economy bounce back now?
The government must forget the fiscal deficit and spend like there’s no tomorrow.
India has depended on monetary policy to support its economy growing at its slowest pace in six years but the government must now deploy more direct fiscal stimulus or risk a long period of stagnation, analysts and experts say.

Modi, however, clearly prefers an incremental approach to reform, one that lessens the chances of a political backlash. He has to fear supporters as much as, if not more than the radically weakened opposition. Influential voices within the ruling Bharatiya Janata Party and its affiliates strongly oppose sweeping trade deals such as the Regional Comprehensive Economic Partnership (RCEP) and the privatization of state-owned companies.

While helpful, though, these measures by themselves aren’t strong enough to revive the animal spirits of Indian and foreign investors. India’s problems are simply too deep. The dividends from the limited reforms carried out in the 1990s and early 2000s have dwindled. The country is more integrated with the global economy — it’s signed free-trade agreements with Southeast Asian nations, Japan and Korea — which only highlights its lack of competitiveness.

A big bang package of reforms is more possible than nervous ministers may believe. They can spend the next two months before the next budget developing credible plans in consultation with business, civil society, and the state governments. And once unveiled, the changes don’t all need to be implemented at once. A calibrated approach over 12 to 18 months would suffice; the important thing is to signal to the market that the government is serious and ambitious. By then, too, the BJP should have a clear majority in the upper house of Parliament, which will make passing bills easier.

Modi remains massively popular and can claim to have fulfilled most of the BJP’s social agenda already. But for his government to be considered truly transformative, it must revive economic growth and put it on a higher trajectory for the next two decades. There are no longer any excuses for delay.


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