Green shoots of revival seen in Indian economy
Manish Sharma finally has a smile on his face. The general manager for sales at Competent Automobiles, one of the top Maruti Suzuki dealers in India, Mr Sharma had something to crow about in December.
His showroom in Connaught Place, in the heart of New Delhi, registered double-digit growth in vehicle sales in the final month of 2019. “October and November were good. But in December, we registered a 10-15% jump in the sales of Maruti cars. It came after seven months of declines,” Mr Sharma told Asia Focus.
Along with an increase in the manufacturing purchasing managers’ index (PMI), a key gauge of economic health, and whopping tax collections exceeding 1 trillion rupees (about US$15 billion) for the second consecutive month in December, the jump in car sales has come as positive news for the Indian economy, which has been sluggish since April 2019.
“The deceleration certainly appears to have a bottomed-out scenario, though I cannot say conclusively whether the economy is on a recovery path until I get to see the data for the fourth quarter (of fiscal 2020 ending on March 31),” said Ranen Banerjee, a partner and leader (economic advisory services) with PwC India.
At this point, Mr Banerjee said, it would be better if the Narendra Modi government did not tinker too much with the economy.
“The government should leave the economy alone, giving some pump-priming support through higher allocations in off-budget expenditure items like NREGS to boost demand,” he said.
The NREGS (National Rural Employment Guarantee Scheme) offers fixed hours of employment to adult members of rural households in the form of unskilled manual work.
Advance estimates by the government forecast that gross domestic product growth in fiscal 2020 will be 5%, down substantially from 6.8% in the previous year. But this would still represent an improvement from the second fiscal quarter when the rate was just 4.5%. The third-quarter rate has been estimated at just 4.3%.
The government has initiated a host of reforms to put the economy back on track. It dramatically slashed corporate tax rates in September and has said that work on infrastructure plans worth 1 trillion rupees was now under way, with the target ultimately expected to reach 3 trillion rupees.
Mr Banerjee says other positive steps the government could take involve logistics. He recommends working to declog ports and develop decentralised micro warehousing for farm products to increase farm incomes.
On the financial front, the Reserve Bank of India (RBI) cut its key lending rate by a total of 135 basis points in 2019, which was good news for business borrowers. However, bank lending remains sluggish.
The government has carried out reforms such as providing banks with extra capital, introducing new bankruptcy rules to give extra protection to lenders, and consolidating the stateowned institutions that dominate the sector. Nonetheless, the banks remain fragile, amid a perception that the reforms have not been aggressive enough.
The economy has been sluggish in the last eight months because of a sharp slowdown in exports, part of a broader global problem, and a decline in industrial production. Private investment has been negligible and non-performing assets (NPAs) have risen substantially, making it difficult for banks to lend to micro, small and medium enterprises.
Anubhuti Sahay, head of South Asia economic research at Standard Chartered bank, called the improved goods and services tax (GST) collections, car sales and manufacturing PMI data “green shoots”, saying that the medium-term outlook remained positive for the Indian economy. She wants the central government to further reduce liquidity stress and carry out input (land and labour) reforms.
As well, Ms Sahay said, the government should focus on education, health and skill development. She has forecast 6% GDP growth in fiscal 2021 but does not expect a return to 7% expansion in the near future.
Madan Sabnavis, chief economist at CARE Ratings, agreed the increase in GST collections, manufacturing PMI and car sales were “positive indications” but said he would wait for October-December quarter data before stating definitively whether a recovery was under way.
He believes the government has already done what it was expected to do. “The economy will do better on its own. The private sector has to pick up. Demand is the driver of all economies. Demand has to grow,” he said.
In his view, it will be hard for the government to make much more progress on land and labour reforms due to social factors.
“It will be difficult to implement labour reforms due to unemployment. Moreover, the issues of right pricing, dwindling farmlands and acquired land that is not used make it difficult to initiate land reforms,” he told Asia Focus.
The country’s unemployment rate is at a 45-year high and reached 7.7% in December. Concerns are growing that the economy cannot create enough jobs for the millions of young workers entering the labour force each year.
The UK-based Centre for Economics and Business Research (CEBR) has said that India is expected to overtake Germany as the world’s fourth largest economy in 2026 and to pass Japan in 2034 to become the third largest. It forecast that GDP would reach $5 trillion by 2026, two years after a deadline set by the Modi government.
“India has decisively overtaken both France and the UK to become the world’s fifth-largest economy in 2019,” the centre’s researchers wrote in their report, World Economic League Table 2020.
But Mr Sabnavis found nothing in the CEBR report to celebrate. “It’s only a statistic,” he said. “India will merely be a large-size economy. Look at the per capita income in Japan and Germany. Look at the delivery of services there. Growing large does not say anything about the quality of life people lead.”