Diwali, the festival of lights and traditionally the Hindu New Year, kicks off with Dhanteras, the celebration of wealth and prosperity. This is one occasion when spending in India kicks into high gear. The lights, however, are considerably dimmer this Diwali. There isn't much to cheer about as India Inc stares into what appears to be the bottomless abyss of an economic downturn.
GDP growth slowed five quarters in a row, declining from a peak of 8.1 per cent at the beginning of the first quarter of FY19 to 5 per cent in the first quarter of this fiscal year. The Reserve Bank of India (RBI) has lowered India's growth forecast for FY20 to 6.1 per cent from 6.9 per cent it projected earlier. The World Bank has cut India's GDP growth forecast from 7.5 per cent to 6 per cent this year.
India is a consumption-driven economy. When consumers buy goods and services, the wheels of the economy turn. That has not been happening for several quarters and for various reasons.
Fewer jobs (at 6.1 per cent in 2017-18, unemployment was the highest in 45 years, as per official data), a freeze in salary hikes and bonuses, layoffs and uncertainty in businesses are making people cut down on spending. Incomes and wages in rural India, where 67 per cent of India's population lives, have been hit because of low food prices. Agriculture GDP grew just 2 per cent in the first quarter of the current fiscal, compared to 5.1 per cent in the same quarter of the previous fiscal.
Consequently, demand for FMCG products, consumer appliances, vehicles and houses has gone down. Growth in private consumption expenditure is down to an 18-quarter low of 3.1 per cent in June. Savings, too, are at an all-time low because of static or falling incomes.
Many say the severe slowdown in demand is at the heart of the present crisis. The malaise runs deep. Manufacturing output, which accounts for more than three-quarters of the Index of Industrial Production (IIP), showed a decline of 1.2 per cent in August, against a 5.2 per cent rise in the same period a year ago. Industrial output growth contracted 1.1 per cent in August as per IIP data, the worst in seven years. India has lost its lead in sectors such as gems and jewellery, textiles and leather exports to other rising Asian economies. Construction, which is a big employment generator, is decelerating because of the slump in real estate.
Exports, too, are sliding and fell 6.57 per cent in September compared to a year ago. Discoms are groaning under a combined debt of over Rs 2.4 lakh crore. Corporate sector revenue growth fell to an 11-quarter low in the first quarter of FY20. Investments plunged to a 15-year low in the quarter ending June 2019.
The banking and financial services sector is in a mess. There is liquidity, but no loans are being given. Banks are tottering under a mountain of non-performing assets of close to 10 per cent of their total assets. They are fearful of giving fresh loans in case they add to their woes. Non-banking financial companies, which are a major source of consumer loans, are in a mess of their own and unable to extend credit for that reason. The interlocking gears of the financial system are jammed. And the string of collapsing financial institutions has further sapped consumer confidence in the system.
The World Bank's South Asia Economic Focus report released this month terms India's cyclical slowdown as 'severe'. Our cover story, 'Not So Happy Diwali', by Deputy Editor Shwweta Punj and Executive Editor MG Arun, looks at the downturn and takes stock of the measures to mitigate it. This is our sixth cover on the economy since April this year.
The government's attempted rescue act includes a host of measures, among them slashing corporate tax rates. There has been a near-unprecedented series of interest rate cuts by the RBI. But even these don't seem to be yielding results in the short term.
These are exceptional times and they call for exceptional measures. Perhaps the government could take cues from what the US did to stave off the crippling recession in 2008. The US Federal Reserve spent nearly 800 billion dollars to pre-empt an imminent economic meltdown.
The Indian economy is in a vicious downward spiral and the Modi government needs to stop worrying about the fiscal deficit and start pouring money into the economy to stimulate growth. They need to put money in people's pockets in every way they can. This appears to be the only way to get the jammed wheels of the economy moving again.
There is, however, a glimmer of hope. The World Bank report predicts growth will pick up next year — going up to 6.9 per cent in 2020-21 and 7.2 per cent the following year. This, too, will depend on how the government tackles the current downturn. First, it has to recognise the seriousness of the crisis rather than dismiss it as a temporary cyclical downturn. The Modi government has yet to show the same audacity and finesse in handling the economy that it does in dealing with political issues. Hopefully, they will do what it takes and the economy will be humming again by next Diwali.
(India Today Editor-in-Chief's note for the cover story, Not So Happy Diwali, for October 28, 2019.)