Economic slowdown: No veil, projections say it all

Just about six months ago, as India was gearing up for general elections, we heard two narratives on Indian economy. The Opposition, though weak and divided, highlighted the government’s failure in managing the economy by stressing on growing unemployment, falling farm incomes, rural distress, declining industrial output and falling investment among others. The government, on the hand, highlighted its achievements by focusing on GDP growth of 7 per cent, claiming it to be the highest in the world. Various statistical numbers were trotted out to suggest that the growth rate since 2014 was higher than that under the Congress-led UPA regime. People who understand numbers and looked at other economic indicators like growth in tax revenue, unemployment rate and agricultural distress did not believe the government’s narrative. Instead, they sensed the clear signs of the onset of an economic slowdown. But they were dismissed as compulsive contrarians.

However, the two opposing narratives, one real and the other disguised in headline GDP number, on the state of economy did not have much impact on the electorate. Though promises around development and economic growth were aplenty in the run up to the general elections, they also did not have any desirable effect on voters. Instead, Modi’s social outreach in the rural belts and the government’s national security pitch post-Pulwama helped the BJP cruise to a landslide victory. What came as a major surprise to political analysts was the fact that probably for the first time a security issue outdid a bread-and-butter issue by giving the ruling party an opportunity to succeed in shrouding the Opposition’s narrative on unemployment, agrarian distress and growth slowdown.

Now six months later, the debate is no longer about how high the growth rate is or whether India is the fastest growing large economy in the world. Instead, the debate is about whether India is in a cyclical slowdown or structural one. With clear signs of growth dropping sharply across sectors, even the government’s economists and spokespersons are forced to acknowledge that there is indeed a major problem with the country’s economy. Despite some differences of opinion on policy measures and interventions needed to stem the downturn, the government’s economic team has begun to acknowledge that the current economic crisis is quite deep. This is a remarkable reversal in stance of the government and its economists, who six months ago, waxed eloquent about how India was the fastest growing economy in the world, generating millions of jobs each year.

The question is: if India’s economic condition is grim, how did the economy deteriorate so rapidly? Let’s go back to 2017 when the GST was implemented in July that year. In November 2017, global rating agency Moody’s upgraded India’s sovereign ratings for the first time in 14 years. Justifying the upgrade, Moody’s had then argued that the Indian economy was undergoing “dramatic” structural reforms under Modi. However, in two years since then, Moody’s has downgraded its 2019-20 GDP growth forecast for India thrice: from 7.5 per cent to 7.4 to 6.8 to 6.2 per cent. The fourth round of downgrade by Moody’s for FY 2019-20 came on October 10, from 6.2 per cent to 5.8 per cent, saying the economy was experiencing a pronounced slowdown, which is partly related to long-lasting factors.

This projection is lower than the 6.1 per cent that the RBI had forecast on October 4. Moody’s attributed the deceleration to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation. “The drivers of the decelerations are multiple, mainly domestic and in part longlasting,” the rating agency said in a report. Last week, the IMF also flagged a “more pronounced” slowdown in India and called for a coordinated fiscal response to arrest the “synchronised slowdown in global growth”. While IMF is likely to lower its India growth forecast this week, on October 13, the World Bank also cut India’s growth rate projection to 6 per cent, warning that the “severe” slowdown could further weaken the country’s stuttering financial sector.

Over the last 17 years, Indian economy has gone through four economic states: economic slowdown (low inflation, low growth) in 2002 and 2003, economic boom (low inflation, high GDP) in 2005 to 2007, economic peak (high inflation, high growth) in 2008 and 2009 and stagflation (high inflation and low growth) in 2011 to 2013. The current phase of slowdown has been a prolonged one, which, according to Mahesh Vyas, CEO and managing director of Centre for Monitoring Indian Economy, started in 2011-12. Since then the steady process of slowing down has not recovered from the downward trend significantly. During this phase two major obstacles came in the way of economic recovery in 2016 and 2017–demonetisation and GST–that made things even more difficult. Today, India is standing at a position which is quite difficult and challenging: investments haven’t picked up for a very long time and consumption has slowed down. While the impact of global financial crisis on Indian economy in 2011 to 2013 was the trigger for the slowdown seven years ago, the current phase of slowdown can’t be blamed on global conditions and trade wars.

The IMF in its July World Economic Outlook has adjusted the projections for India’s 2019-20 growth rates downwards by more than those for advanced economies or Asian developing countries. This, according to economists, suggests that the source of the problem is domestic, rather than global. The consensus among economists is that the slowdown in consumer spending, which accounts for 60 per cent of GDP, is the major domestic cause for the downturn. This is a result of self-inflicted blows: demonetisation and chaotic implementation of GST. While this was done with the intent of converting a largely informal economy to a formal one overnight, all it did, according to Maitreesh Ghatak, Professor of Economics at the London School of Economics, was simply dry up the informal sector, where nearly 80 per cent of the population is engaged, leading to massive losses in employment and income not fully captured by the GDP.

Generally, economic slowdown cycle is followed by boomlike conditions when growth picks up and inflation remains low. This happened between 2003 and 2007. Will it happen again in coming years? It could, provided there is a coordinated fiscal and monetary stimulus to reverse the ongoing demand slowdown. Corporate tax cuts and downward interest rates notwithstanding, a demand side push is required from the government to spur private investment and activate supply side. The writer is an independent Mumbai-based senior journalist.