Multiple pointers are indicating the persistence of an economic slowdown in Asia’s third-largest economy. And these are too serious ones to ignore to get back the economy back on the high growth path and ensure that fruits of economic growth reach the common man.

1) Brokerages have begun using strong words to warn a serious demand slowdown in consumer segments. For instance, in a research note dated 4 May, Kotak Institutional Equities talked about a ‘sharp, sudden deterioration in short-term demand narrative.’

“We see a major shift in tone (for the worse) on short-term demand narrative in the management commentaries of the companies that have reported thus far. When generally-measured management like HUVR (Hindustan Unilever Ltd) uses the term ‘recession’ in its comments in the post-results presser, it generally isn’t a one-quarter blip,” the brokerage said. In a separate report, the same brokerage noted that given the sharper than expected slowdown in consumer goods, the economy will need fixes firmly focused on structural measures.

2) There is indeed a demand slowdown as it is clearly visible not just in the sales projection of consumer goods companies but the reported numbers of automakers for the month of April. Maruti Suzuki India (MSI) and Hyundai Motor India too reported a decline in their domestic sales in April with 18.7 percent fall and 10.1 percent respectively. Similarly, the cumulative sales of the top six two-wheeler manufacturers declined to nearly 1.58 million units last month, from 1.88 million units during the same period a year ago. The story isn’t different for tractor sales also. These three indicates urban, semi-urban and rural demand.

3)The India growth story, which has been primarily riding on government spending, is now at a tricky point. This is because the government may not be in a position to continue the spending spree in the months ahead on account of major fiscal constraints. The fiscal consolidation road map has been missed for three consecutive years and populist policies are gradually taking over in the election year, adding to the fiscal burden. In such a situation, if the consumer demand drops sharply that will be a double whammy to the economy.

4)The rural economy, which largely depends on agriculture, is in a mess. Falling prices of agricultural produce and lack of irrigation/ storage facilities have been hurting the farmers. The MSP formula worked out by the centre has failed to ease the pain of the farmng community. As this Firstpost article pointed out farmers’ income has suffered significantly in recent years as against the government’s promise to double it by 2022. The average annual agricultural GDP growth has been 2.9 percent in the past five years, lower than the 4.3 percent rate achieved during the preceding five years. Also, agricultural exports have fallen from a high of $43 billion in 2013-14 to $39 billion last year, while agricultural imports have risen from $14 billion to $23.5 billion during this period.

5)The manufacturing sector isn’t looking good. The factory output (index of industrial production or IIP) numbers for February have shown a 0.1 percent growth in February as against 6.9 percent in the year-ago period. That’s the slowest growth in at least 20 months, data shows. In June 2017, the IIP growth was contracted by 0.3 percent. In the April-February period, the IIP grew by 4 percent. During fiscal 2018 (April-February), the factory output had grown 4.3 percent. In April, the Nikkei/IHS Markit Services Purchasing Managers' Index (PMI) dropped to 51.0, which is the lowest level since September.

6)The unemployment situation is not improving. India’s unemployment rate in April accelerated to 7.6 percent, the highest since October 2016, and up from 6.71 percent in March 2019, according to data compiled by the Centre for Monitoring Indian Economy (CMIE). The increasing number of people in the formal workforce not being able to get quality jobs indicates underlying weakness in the economy.

7) High effective labour costs are paving major hurdles in job creation. In a recent research note, JP Morgan says it is not only lack of private investments but also the high effective cost of labour in relation to the capital that is playing a villain when it comes to job creation. India’s effective cost of labour remains inordinately high both because of strict labour laws (on the demand side) and educational/health/skill constraints (on the supply side).

8) There is a significant fiscal shock in the offing in the form of populist packages no matter who wins Parliament elections. Congress party plans a minimum income scheme that will cost the exchequer an estimated Rs3.6 lakh crore while the ruling BJP too has plans to roll out a bunch of populist schemes including interest-free loans and extending Prime Minister Kisan Yojna to all small farmers. These will be over and above a number of farm loan waiver programmes being implemented at state-levels. The combined fiscal burden on state and central governments will cause a drag on the economy.

(Data contributed by Kishor Kadam)

Updated Date: May 06, 2019 14:15:10 IST

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