Economic Slowdown - March 2019

Why in news?

Many micro- and macro-economic indicators signal that the economy is slowing down.
It is imperative, in this context, to look at the reasons behind and the prospects for future growth.

What are the signs of decline?

Maruti Suzuki, the largest carmaker, posted double-digit growth rates of about 14% in passenger vehicle sales during April-June 2018.
But it witnessed declining sales for most months except October 2018 and January 2019, with less than 2% growth.
Maruti Suzuki also recently announced of a cut in car production for March by over 25%.
Tractor sales for Mahindra, which has a 40% plus market share, declined in December 2018.
The growth was flat in January 2019 and dropped in February too.
Two-wheeler sales' growth is very moderate since December 2018.
In February, the two biggest two-wheeler producers, Hero MotoCorp and Honda Motorcycle, reported lower sales.

How is the consumption side?

So far, consumption slowdown had affected only discretionary expenditure i.e. in products such as cars and consumer durables.
But now there are signs of a consumption slowdown spreading to non-discretionary items such as food items too.
This is a more worrying trend because India continues to be a consumption-led economy.
Consumption expenditure contributes almost 56% of the country’s GDP.

What do the macro indicators suggest?

Macro indicators too are not presenting any encouraging signs either.
The 8 core segments (steel, cement, fertilisers, coal, electricity, crude oil, natural gas and refinery products) grew at 1.8% in January.
This is low in comparison with 2.8% in the previous month.
Notably, 8 core segments together make up about 40% of industrial production.
The growth in industrial output itself dropped to 1.7% in January 2019 against a growth of 2.6% in December 2018.
Moreover, the GDP growth rate in the first 3 quarters (April-June, July-Sep and Oct-Dec of 2018) was 8%, 7% and 6.6% respectively.
This clearly shows a trend of sequential slowing down.

What are the reasons?

The demand for passenger vehicles slowed down during the second half (beginning September 2018) of this financial year.
This is due to many reasons like high interest rates, higher fuel prices and lack of credit.
Suggestively, consumers have only postponed the decision to purchase vehicles, and so this is not likely a permanent destruction of this demand.
At a very broad level, demonetisation and introduction of GST naturally had an adverse impact on the economy.
India has largely been a cash economy, and informal sectors were dealt a harsh blow because of this.
Cash was squeezed out of the system, and many small businesses continue to find it difficult to cope with the GST regime.
The currency in circulation post demonetisation dropped by about one percentage point.
Over the last two years, bank credit slowed down dramatically because banks had to make higher provisions for bad loans.
6 public sector banks are under the central bank’s prompt corrective action framework, and some others have voluntarily put a hold on lending.
Resultantly, retail and businesses found it quite difficult to access credit.
Non-banking finance companies compensated for this gap till the middle of 2018.
But the default by IL&FS pushed the NBFC segment into a liquidity crisis.
Alongside these, interest rates continued to remain high.
So poor bank credit, liquidity crisis and high interest rates all created a huge drag on the economy, resulting in the current slowdown.

How is future growth potential?

A slowing economy has varied implications to the economy and people, as it affects income of people and job creation in the country.
The government expects the economy to grow at 7% in 2018-19, which is slower than 7.2% in 2017-18.

Globally analysing, after growing at 3.1% in 2017, the world economy is estimated to have slowed down to 3% in 2018.
Moreover, the outlook for 2019 suggests that this would slow down to 2.8% over the next 2 years.
The prospects over the coming 3 years for both the US and the Euro zone are uninspiring as they point to continuous slowing down.
China’s GDP growth rate is expected to drop to 6% in 2021 from 6.5% in 2018.
In this backdrop, India seems to be the only economy expected to have a 7.5% in the coming years till 2021.
The World Bank’s latest Global Economic Prospect has suggested the same.

What does it imply?

Clearly, within India, the narrative is that of an economy slowing down.
But investors in Hong Kong and New York are celebrating the Indian growth story.
This probably explains the billions of dollars being pumped by foreign investors into the Indian stock market.
India thus continues to be a profitable long-term bet for global investors.
So, given its potential, India can definitely jump into the 8-10% growth orbit.

Source: Indian Express

Author: Shankar Civil Service Coaching Center Trichy