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Last Updated : Sep 03, 2019 07:26 PM IST | Source:

Stuttering economy: Immediate need to revive demand, feel experts

India's gross domestic product (GDP) grew 5 percent in April-June 2019, official data released on August 30 showed, buffeted by weak household spending and muted corporate investment. GDP growth was 8 percent in the same quarter of 2018-19.

India may have to go through a prolonged period of economic slowdown if the government doesn't look into sector-specific measures to rev up demand, according to experts.

Hostile global environment and a prolonged period of consumption slowdown lead to the government announcing a host of measures to supplement the Reserve Bank of India's monetary stimulus.

"The bank mergers announced are not the near term measures but the previous set of announcements like the bank recapitalisation, measures to de-clog finance for MSMEs financing, refunds, measures for FPI, were all supply side measures," said Shubhada Rao, chief economist at YES BANK.


On August 23, Finance Minister Nirmala Sitharaman announced a slew of measures like eased foreign investment rules, concessions on vehicle purchases and encouraged banks to make loans cheaper to spur growth from a five-year low.

India's gross domestic product (GDP) grew 5 percent in April-June 2019, official data released on August 30 showed, buffeted by weak household spending and muted corporate investment. GDP growth was 8 percent in the same quarter of 2018-19.

"Whatever has been announced by the government till now is to de-bottleneck the supply side. But the critical issue at this time is how to revive demand. All the cash transfers that the government had promised through budget, how fast-tracked have they got because until and unless you have money in the hands of people, the supply side measures would yield, but you have to have demand too to work in tandem," Rao said.

To tide over a cash crunch in the banking sector, the RBI cut interest rates by 110 basis points this year to boost loans and revive investment. This was followed by the finance minister announcing the government's decision to  inject Rs 700 billion to recapitalize state-run banks and encourage them to lend.

"Whatever has been promised in the budget, the way they have frontloaded the bank recapitalization, they need to front load other measures also. From what it looks like now, quarter one and quarter two have been washed out. The slowing momentum has been more intense than envisaged," Rao said.

However, nothing much has been announced yet that could revive demand. "Collapse of private consumption demand from 10.6 percent in fourth quater of FY18 to 3.1 percent in first quarter of FY20 is real cause of concerns. Both structural and cyclical issues are plaguing Indian economy and in order to bring economy back to a respectable growth path both short-term and long term measures are required," said Devendra Kumar Pant, chief economist and senior director, public finance, India Ratings and Research (Fitch Group).

Declining savings, especially household savings, is turning out to be a major challenge for the economy and is leading to structural growth slowdown. While the government has a strained fiscal space to undertake counter cyclical measures, there is a need to undertake some measures to provide short-term boost to the economy, experts believe.

"After agriculture real estate/construction is the second largest employer and also has the huge backward and forward linkages with other sectors. So reviving real estate sector will be crucial both from the investment as well as consumption point of view... these measures will play out only in the medium-term," Pant said.

All sectors seem to have been hit hard by subdued demand. The auto sector is in the midst of one of its worst crisis. Passenger vehicle sales in the country declined by 17.07 percent, 20.55 percent, 17.54 percent and 31 per cent respectively in the months of April, May, June and July.

A persistent liquidity crunch among India's shadow banks that has been the biggest single factor in an auto sales collapse, which some fear may lead to more than a million job losses. Non-banking finance companies (NBFCs), or shadow banks, have dramatically slashed lending following the collapse of IL&FS in late 2018.

India's largest carmaker Maruti Suzuki posted a decline of 36 per cent in sales in August, at 93,173 units compared to 145,895 units in the same month last year. This was the second month in a row that Maruti  dispatched less than 100,000 cars to dealerships.

Slowing demand has moved beyond discretionary purchases, with fast-moving consumer goods (FMCG) companies that manufacture soaps, biscuits and other daily essentials reporting gloom in consumer sentiment.

India's FMCG giant Hindustan Unilever Ltd reported a 7 percentage point dip in volume growth between the June quarter this year as against the same period last year. Britannia Industries also recorded a 7 percentage point drop. Dabur India, reported a 15 percentage point dip during the April-June quarter.

A major factor behind this demand-led slowdown is a possible reduction in household savings, which in turn is a result of declining growth in both urban and rural wages.

“We find that for the Indian economy there are clearly a host of structural factors that are holding back current consumption. A substantial decline in wage growth (both rural and urban wages) in recent times resulting in lower household savings (a result of conscious policy decisions to correct macro imbalances) has possibly slowed down the growth in real per capita income that is holding back demand,” a study by SBI said.

The manufacturing sector grew 0.6 percent in April-June 2019 from 12.1 percent in the same quarter last year, and 3.1 percent in January-March, reflecting decelerating production activity in India's factory floors.

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First Published on Sep 3, 2019 07:25 pm
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