Indians were fearing recession even before data showed that GDP growth hit a six-year low

Advertisement
Indians were fearing recession even before data showed that GDP growth hit a six-year low
  • The GDP growth rate for the first quarter of the 2019-20 came lower than expectations, at a mere 5%.
  • However, online searches for ‘recession in India’ had spiked many times over in the last couple of months.
  • Afraid of a severe slowdown, Indian consumers had cut back expenses, even on items of daily use, setting in motion a vicious cycle of slowdown in manufacturing, investments, and unemployment.
  • Economists hope the recent stimulus from both the government and the RBI, as well as good rains, will help in reviving both the economy and the sentiment.
Advertisement


India’s growth in gross domestic product (GDP) between April and June 2019 was a mere 5%, the worst in over six years and way below estimates. The data was released on Friday (August 30) but people in India had already been fearing a recession much before the government admitted to a sharp slowdown.

Google Trends show that online searches for ‘recession in India’ spiked in the last couple of months, many times over, showing that people had already started to feel the pinch.


Indians were fearing recession even before data showed that GDP growth hit a six-year low

The very first day of trading after the Finance Minister Nirmala Sitharaman announced the mega merger of ten public sector banks (PSB) into four, the stock markets went tumbling down on Tuesday September 3. Sensex shed 600 points whereas Nifty lost over 180 points. This fall was led by PSB stocks and most of their stocks were down by over 5%.

Advertisement

This is one of the many measures taken to revive the economy. The economic wheel was brought to a grinding halt by demonetisation in November 2016, and the recovery was delayed by the disruptions caused by the introduction of Goods and Services Tax (GST) in mid-2017.


As tax revenue fell, the Narendra Modi government reduced spending to keep the fiscal deficit under check. Private investments had already gone into a shell, and as the Modi government tightened its purse strings in the last year of its first term, economic activity spiraled down.

Indians were fearing recession even before data showed that GDP growth hit a six-year low


The report authored by Soumya Kanti Ghosh is pushing for more aggressive interest rate cuts by the RBI. “We believe it is incorrect for central bankers to suggest that they have this challenge under control - or that with their current toolkit they will be able to get it under control,” said SBI Ecowrap.


Advertisement
This deep slowdown is a culmination of many areas, in addition to decline in consumer sentiment right from slowing auto sales to reduced air traffic growth to cut backs on items of daily use.


Before taking a look ahead, let’s look at the three main areas where growth is slowing down.


Consumption hits a standstill with job losses

Weary Indians are cutting down on expenses like no other, and that has affected the economy. As many as 350,000 jobs were cut in the formal sector of automobiles. This massive number does not count in textiles, diamond workers and others.


Advertisement
Combined with the informal sector job loss, the consumption loss would translate to around ₹15,000 crore. The growth in consumption expenditure slumped to 3.1% in the three months ending June 2019-- the weakest in five years.


More than half of India lives outside the cities, and the broad-based consumption slowdown reflects the deep distress in the rural parts. “Agriculture, forestry and fishing output grew by 2% improving slightly from de-growth (contraction) of 0.1%,” said a report by Edelweiss.


Manufacturing shutters down


With low consumption and almost no demand growth in sight, the quarter’s manufacturing growth was as low as 0.6%. This is in spite of high growth in electricity and utility expansion.

Advertisement

Investment lowers with less to spend


Indian companies are seeing less reasons to keep their plants running, there is much less to invest either. As a result, investments growth has slipped to just 3.7%. Companies are choosing to park their money in financial assets rather than betting on a slowing economy.


“With low wage growth rate, household savings are also particularly down. Thus, households are not closing the savings-investments gap and this is bringing down overall investments,” said Edelweiss. Simply put, people are choosing to hold on to cash rather than invest anywhere other than gold.


Will the Indian economy weaken further or enter a recession?

Advertisement

An economy is defined to be in a recession if growth contracts for two straight quarters. That isn’t the case with India.


However, many sectors within the Indian industry like automobiles and textiles-- two of the largest providers of jobs-- are already in recession. So there are reasons to worry but may be not for panic.


The chickens have come home to roost. But the government has woken up to the emergency and is shoring up money to battle the slowdown. “Based on fiscal deficit numbers, in Pradhan Mantri Kisan Yojana (PMKY), the government will save ₹30,000 crore. If we add RBI surplus transfer, the Government further would have adequate cushion for make up for revenue loss,” said a report by SBI Ecowrap.


Advertisement
The more money the government spends in stimulating demand and investments in the economy either through sops for consumers or incentives for industries, the sooner the economy will revive.


Aside from giving the government a part of its reserves, the RBI has already cut interest rates four times this year hoping to bring down lending rates, and Edelweiss believes that India’s GDP growth will start improving hereon as the effect of RBI’s measures start to trickle in.


The rains will also have a role to play. “This number is likely to improve further the next quarter as a South-west monsoon season has been normal for this year,” the Edelweiss report said.


Just like the pain of demonetisation and GST have lingered on for over two years, the government’s recent measures to boost economic growth may show effect with a lag.
Advertisement



{{}}