Fixing The Economy
Why it will take time to get back to high GDP growth
The festive season is on but unlike before, Sushil Aggarwal, owner of Ghaziabad, Uttar Pradesh-based Avon Modplast, a moulded plastic furniture manufacturing company has yet to see a jump in sales. Orders from rural and semi-urban parts of North India remain subdued. Capacity utilisation is hardly 40 per cent. “Consumers are confused, and sentiments are down”, complains Aggarwal.
Animesh Saxena, who runs Neetee Clothing, an apparel export unit in Gurugram, Haryana says the supply chain in the apparel and textile sector is in trouble with the introduction of the Goods and Services Tax (GST) regime. “Unless urgent measures are taken, a revival of textile exports seems very difficult,” he warns.
Sunil Harzai, of Noida-based Sidharth Exports, an established leather products manufacturer believes discriminative tax policies are turning the sector non-competitive. His sales are down 35 per cent and capacity utilisation 40 per cent.
It was the macro-level impact of problems highlighted by the likes
of Aggarwal, Saxena and Harzai – among the millions operating Small & Medium Enterprises or SMES across the country – that was high on the agenda of the re-constituted Prime Minister’s Economic Advisory Council (EAC) on 11 October and the 22nd meeting of the GST Council on October 6.
With first quarter GDP growth figures at 5.7 per cent – the slowest in three years – fixing the economy was top priority for the government. The focus areas of the EAC, chaired by Niti Aayog member Bibek Debroy,oy, include economic growth, job creation, informalornd sector, patterns of consumption and production, among others. It is focusing on critical interventions to accelerate economic mic growth and employment over the next few ew months, with greater social and financialiall inclusion, based on rigorous analysis.
The GST Council meet focused on thehee problems of small units. Finance ministerterr Arun Jaitley did not disappoint. The GST T council eased the compliance burden on n small and medium businesses and exporters s through fewer tax filings, reduced rates on n 27 items, talked about introducing an ewallet - system by April 1 for faster input credit, and deferring some provisions.
Jaitley was not just trying to fix problems faced by small businesses alone. He had a much bigger problem to fix – a slowing economy at a time when the global economy was showing some signs of growth.
Earlier, on September 28, Jaitley got central public sector undertakings (PSUS) to commit an additional `25,000 crore capital expenditure plan, over and above the `3.85 lakh crore budgeted in 2017/18, to bolster economic growth. The task before the entire government and political leadership today is to fix the economic health of the economy and do that quickly.
A Business Today survey indicates (see Rock Bottom) sentiments of the business community were never so low. It confirms observations made by the Reserve Bank of India’s (RBI) industrial outlook survey which saids there is waning optimism during JulySeptemberS 2017 about demand conditions acrossa parameters, especially on capacity utilisation,u profit margins and employment.
Many analysts, think tanks and research bodiesb have reduced India’s growth outlook forf the year. The Economic Survey forecasts
GDPG growth to at the lower emd of the 6.75 – 7.5 per cent band. The World Bank revised IndiaI estimates from 7.2 to 7 per cent; the RBI believes it will be 6.7 per cent and Morgan Stanley revised its forecast to 6.4 per cent from 7.6 per cent. Almost every rating agency and equity advisory firm tracking the Indian economy has made a downward correction of the country’s 2017/18 growth projections. The most optimistic estimates now peg annual GDP growth to a tad below 7 per cent this fiscal.
WHAT IS WRONG?
A ll major engines of economic growth – private investment, private consumption, exports, agriculture and even government expenditure – have either
failed to pick up momentum or slowed down. In urban areas, construction and real estate – one of the biggest employment generators – has stalled. In rural areas, the 4.1 per cent agriculture and allied sectors growth in 2016/17 did not result in comparable improvement in farmer incomes.
India’s economic worries didn’t begin today. PM Modi inherited a shaky economy that he couldn’t mend in the last three years. Though economic growth looked up briefly for a year after he took charge, the slowdown started even before demonetisation happened.
Even when Modi took charge in 2014, private investment, consumption and exports, were registering weak or negative growth. Private investment never picked up as there was excess capacity and many were laden with debt. The government’s attempt to clean up the banking system by introducing bankruptcy laws only aggravated the short term crisis. Further, demand for products or rate of private consumption was very low resulting in idle capacities. Part of the rural slowdown had to do with tepid growth in agricultural income. Bad monsoon and low prices crippled the rural economy.
In the organised sector, enough new jobs were not getting created, which led to subdued consumption. The third component of GDP, exports continued its slow growth for 18 months, before regaining growth, though at a slow pace. A monthly 10 per cent growth in August was more of an aberration than the norm.
The Economic Survey, on August 11 had clearly flagged the declining trend in India’s GDP growth. It points out that though India’s GDP growth during the last two years was on an average 7.5 per cent, it was achieved against the context of weak investments, export volume and credit growth. Coupled with the troublesome signs was the disruption caused by real exchange rate appreciation, farm loan waivers, increasing stress to balance sheets in power, telecommunications, agricultural stress, and the transitional challenges from implementing the GST— all leading to an imminent slow down. Around the same time, the Monetary Policy Committee of the RBI highlighted the continuing retrenchment of capital formation in the economy. It stated that the weakness in the
Economic growth has fallensharply because GST has created a scare among people SUSHIL AGGARWAL Avon Modplast
“Since supply chain disruptions are largely over, most of the import jump will be reversed in second half of 2017” ARVIND VIRMANI Former Chief Economic Advisor
capex cycle was evident in the number of new investment announcements falling to a 12-year low in the April-June 2017 period, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.
All along, the Modi government has been trying to minimise the negative impact through additional government expenditure. It has front-loaded expenses in such a manner that, unless it slows down, or finds means for additional income over and above the budgeted projections, it may falter on its fiscal deficit targets. Since the government is yet to take a call on relaxing the fiscal deficit target, government spend has also begun to slow down, resulting in the slump in quarterly growth numbers. The twin disruptions, demonetisation and GST, augmented the already existing crisis.
“You can forget about the next (second) quarter. You will be lucky to see improvement the quarter after. You have not seen the worst. The economy will continue on its current trajectory”, says Pronab Sen, former chief statistician of India.
Why is it happening? What can the government do? Of the two prescriptions, one proposes a fiscal stimulus; essentially that the government spends more, irrespective of the size of the hole in its wallet. The other is identifying and tweaking policies dragging down growth. Since the EAC is not in favour of a fiscal stimu-
lus, what remains now is to fix problems plaguing policies in sectors that contribute big to employment and growth – from textiles, to leather, to export promotion.
SECTORAL IMPACT
Neetee Clothing’s Saxena has reasons to fear the Modi government might have undone the good it did for the textile sector by announcing a special package some months ago, through the GST.
The textile package – which included a 3 per cent additional duty drawback and support to encourage fresh recruitment by taking care of their provident fund payments – came as a boon to the industry which was struggling with competition from Bangladesh where productivity was high and wages low. The additional leeway helped the industry quote competitive prices to global franchises and retail chains for export orders. The results were beginning to show when GST happened.
“The textile sector used to be largely a tax free industry. There was no VAT, and excise applied only on certain large companies. GST changed all that. The immediate causality is our profitability,” Saxena says.
The implementation hurdles, in terms of confusing and often too frequent circulars and clarifications, and the increasing blockage of working capital due to pending refunds are only adding to their worries. The GST Council did take care of the working capital issues. But other issues remain.
The problems faced by the industry will take more time to hit their production volumes. “We accept export orders after doing costing and price quotes six months in advance. Today we don’t know what will be the drawback amount that we can expect. If we don’t accept export orders, we are doomed. If we accept, we are losing money. That’s the situation”, Saxena says.
Leather too has lost its growth momentum in the last three years for economical and political reasons. It depended heavily on the unorganised sector for raw material collection. Demonetisation hit the sector hard, as hide collection, up to the tannery level was entirely cash driven. The intolerance against people who deal with animal hide shown by fringe groups claiming allegiance to the ruling front was another reason. And GST was the hardest of all.
Noida’s Sunal Harzai says: “This is a labour intensive industry. There are close to 3 million people working in this trade. You are making leather product manufacturing uncompetitive by putting 18 per cent service tax on job work. On leather, tax used to be 2 percent, now it is 12 percent. On sole, tax rate has increased from 12 per cent, to 18 percent. MSMES can never be competitive”, he says.
Harzai is not convinced with the government’s promise of quick refunds. “When VAT system was introduced, there was a similar promise. Close to `2 crore of my claim is stuck with the VAT department for four years. We are begging for our own money, but we are not getting it”. He says the current business environment favours imports over domestic manufacturing. His fears are not entirely misplaced.
Arvind Virmani, former chief economic advisor to finance ministry says that his analysis of the Indian economy since 2011/12 showed that disruption of domestic supply chains following demonetisation did result in a diversion of demand from domestic to foreign suppliers and a sharp jump in imports in first half of 2017. However, “as these supply chain disruptions are largely over, most of the import jump will be reversed in second half of 2017,” he adds.
Lack of demand is real in several sectors. The residential property market is unlikely to see a revival in the next 12 – 18 months, says CRISIL Research.
Restrictions on cash transactions and the availability of cash was one of the reasons for the slowdown, but more than that, the implementation of the Real Estate Regulatory Authority (RERA) contributed to the weak demand, Tripathi says.
The cement sector depends heavily on the growth of the construction sector. A downturn means lesser jobs which also mean less disposable money in the hands of skilled and unskilled workers, mostly migrants from India’s rural and semi-urban areas. Less money
“You can forget about the second quarter. You will be lucky to see improvement in the quarter after. You have not seen the worst. The economy will continue on its trajectory ” PRONAB SEN Country Director, IGC India - Central Team