Tata Motors

.

Finance Minister Nirmala Sitharaman with Uday Kotak, MD of Kotak Mahindra Bank, during the National Council Meeting with members of CII in New Delhi on Friday

Charan Singh

Deepak Parekh

.

Finance

Nirmala Sitharaman

.

By Puja MehraThe Indian economy has been declining for a while now, but the bottlenecks have been compounded by the policies of the first Modi governmentDhiren Shah is running from pillar to post in search of a few lakh of rupees. If he doesn’t find it soon, he will have to let go of some of the staff at AIM Nonwovens, a Pune-based manufacturer of filtration systems and interior parts for cars. It’s a small company with an average monthly turnover of Rs 2 crore. Among the customers for its products are auto manufacturers such asand Ford, and buyers overseas.“Our customers are seeing a massive slowdown in car sales, and have reduced production,” says Shah, managing director of AIM Nonwovens. “All was fine until a month-and-a-half ago, but now, orders have come to a screeching halt as supplies from our manufacturing unit are piling up in the inventories. We are unlikely to see an uptick in our orders in the next few months.”No orders mean idling plants. Yet, despite lower revenues, loan repayments, wages and other fixed costs must be covered. Normally, a company with a sound track-record tides over such liquidity crises by borrowing from banks.But banks have limited their lending as well. Growth in lending by banks has been moderated for the second successive month to 12.5 per cent in May — its lowest since September 2018 — from 13.0 per cent in April.The benefits announced precisely to help out small companies like Shah’s, such as interest rate subventions and schemes for restructuring loans, are not trickling down, he says. “For a company with assets of more than Rs50 crore, it is becoming difficult for us to raise Rs50 lakh.”The liquidity crunch has become tighter because it’s no longer as easy to do business. AIM Nonwovens sought refunds of Rs21 lakh for the Goods & Services Tax (GST) paid. But the claim is pending. “We’re told there has been a technical problem,” says Shah.A total of Rs1.75 crore that is due to him, is locked up at various levels of government red tape, says Shah, including a rejected claim for subsidy reimbursement of Rs50 lakh under the Technological Upgradation Scheme.Even as Shah struggles with the liquidity crunch, he has received a prosecution notice for a delay in payment of tax dues. “The government is not refunding the GST paid, and is sending notices for delayed tax payments to me, a regular taxpayer,” says Shah.Auto ancillary companies like Shah’s are shedding manpower and reducing the number of hours for which the plants are run. The entire sector is, in fact, reeling under the impact of a severe sales slowdown and, consequently, huge job cuts.The Society of Indian Automobile Manufacturers (SIAM) reports that sales of all types of vehicles declined by 12.35 per cent to 60,85,406 units in April-June 2019, against 69,42,742 units sold in the same period the previous year. At the same time, passenger vehicle sales have been declining for almost a year now.The country’s biggest car-maker, Maruti Suzuki, reported a 36 per cent annual decline in car sales for the month of July. Hyundai sales fell by 10 per cent.To manage the impact of this sales slump, vehicle retailers, too, are reducing manpower. Dealerships have cut around two lakh jobs in the last three months, according to the Federation of Automobile Dealers Associations (FADA). These job cuts are over and above the 32,000 that were axed when 286 showrooms closed across 271 cities in the 18-month period ending April 2019.Reduced vehicle production by companies, such as Tata Motors, has spread the pain to the ancillary industries in the auto sector. In and around Jamshedpur, for instance, some 30 steel companies are reported to be on the verge of closure. About a dozen have already downed their shutters after the Tata Motors manufacturing plant ran for only 15 days a month in the last two months, remaining shut for the rest of the time.“The auto sector [impacts] 100 ancillary industries,” says Dr, economist, non-executive chairman, Punjab and Sind Bank, and CEO of EGROW Foundation, a Noida-based thinkank. “When it stagnates, these 100 industries slow down as well. The automobile industry is holding 400 per cent higher inventory than normal times in select automobile segments. So, a large number of people’s incomes are getting impacted.”The housing sector is similarly linked with nearly 300 ancillaries, which suffer if housing sales stagnate. The housing crisis of 2007-2008 in the US had taken a decade to recover. In India, developers estimate that over 12.76 lakh houses are lying unsold across India’s top 30 cities. The inventory build-up is as high as 80 months in Kochi, 59 months in Jaipur, 55 months in Lucknow and 72 months in Chennai. What this means is that unsold homes could take up to five to seven years to find buyers in these cities.The problems are not new. The economy has been struggling with an investments and manufacturing slowdown since 2012. Exports growth been stagnant since 2014. The farm sector has been largely unremunerative.In the three years from 2016-17 to 2018-19, GDP growth was at 8.2 per cent, 7.2 per cent and 6.8 per cent respectively. In the four quarters from April-June 2018 to January-March 2019, GDP growth slowed to 8.0 per cent, 7.0 per cent and 6.6 per cent. This shows that in the course of four quarters, GDP growth slowed by 2.2 percentage points — which is a significant loss of economic momentum.But as HDFC chairmannoted, while speaking of the “distinct slowdown” in the economy to his company’s shareholders at the annual general meeting last Friday, the pain has spread, and is now affecting even consumption spending.Latest data from the Reserve Bank of India shows that in the first half of 2019 — from January to June — retail personal loans disbursement grew at the slowest rate in five years. Disbursement slowed from 7.7 per cent in the same period the previous year, to 7.3 per cent in this period.Business leaders and the stock market (that has lost nearly 10 per cent in value since it hit a record high just after the 2019 elections results were declared) had been betting all along on the Modi government for clear-eyed policy responses to the economy’s problems, many — but not all — of which it had inherited back in 2014.But the wait has proved frustrating. Far from getting reversed, the slowdown is expected to deepen. The National Council of Applied Economic Research (NCAER) has projected GDP growth for the current year, 2019-20, at 6.2 per cent — slower than the previous year. Agricultural growth, in particular, has collapsed, it says in its quarterly review of the economy released earlier this week.The government has been slow to respond to the rapidly worsening situation. Although the slowdown was apparent even ahead of the July 5 Budget,Ministerbegan meeting industry representatives to gather specific inputs to craft response measures only this week. “The government must engage the industry in a sustained dialogue to find way of addressing the slowdown,” said Saumen Chakraborty, CFO of Dr Reddy’s Laboratories.To kickstart the economy, the problems of the real estate sector must be redressed, recommends Dr Singh. A substantial chunk of the savings of households is locked in the housing sector, which is currently sluggish. Assuming that the average value of unsold properties is Rs 40 lakh, the amount of money tied up is substantial. The government should, therefore, focus on releasing the holding of capital in housing. A simple way to unblock it, he says, is a stamp duty holiday for a window of, say, one-and-a-half years or so.“Some states have 12 per cent stamp duty and others have seven per cent,” Dr Singh says. “The central government can make it a uniform two per cent across the country for the declared period. Business will start again as soon as people start selling houses. Instead of depending on banks, this can lead to more savings as well as more business and incomes.”The economy is not slowing down because of an external shock or a spike in international crude prices.The pain is a consequence of the structural problems, and the cumulative neglect of reforms by successive governments. The bottlenecks have been compounded by the policies of the first Modi government. This includes demonetisation and a poorly-designed rates and compliance structure for GST. This, apart from a continuing lack of will to reform the decrepit public banking system and the financial sector’s problems inherited from the UPA government. What these structural problems need, is well-crafted economic remedies.Instead, as Dr Rajat Kathuria, director and chief executive, Indian Council for Research on International Economic Relations (ICRIER), observes that the government’s response to the slowdown — hikes in import tariffs announced in the July 5 Budget, for instance — remains ad hoc and may not deliver the goods.The policy package must include ways of incentivising firms that are leaving China to come to India to set up manufacturing units, he recommends.The task for the government is not only to accelerate GDP growth, but also to make sure that this generates jobs. “Because of the distortions created by labour laws, companies are hiring contract labour and substituting capital for use of labour — despite India having the advantage of a low-cost and large-sized labour force — and so, jobs are not getting created,” says Dr Kathuria. “As a result, the Indian textiles industry, for instance, which is a labour intensive industry, has become more capital intensive than its counterparts in Bangladesh and China.”