Macro Matters | Slowdown is official. Economy’s revival now depends on govt heavy lifting

The earliest markers of an economy’s health are found in car showrooms, retail malls and the rapidity of activity in farms. Recent months’ data related to these would suggest that the Indian economy is going through a bumpy ride.

Official national income figures released on August 30, 2019, confirmed these fears. The Indian economy grew 5 percent in April-June 2019, from 8 percent in the same quarter last year and 5.8 percent in the previous quarter (January-March 2019), implying that people are putting off purchases on aspirational items such as cars and televisions.

This is showing up in the reams of official statistics, too. After adjusting for inflation (constant prices), private final consumption expenditure (PFCE) -- a realistic proxy to gauge household spending -- stood at Rs 1,974,438 crore during the three months to June 2019, growing 3 percent over last year’s Rs 1,914,259 crore in the same period.

This reflects a slowdown. Last year, during the same three months, people’s spending grew 7.3 percent over 2017, broadly mirroring what the car companies have been reporting. According to Society of Indian Automobile Manufacturers (SIAM) data, passenger vehicle sales declined 18.42 percent during April-June. Vehicle sales across all categories fell by 12.35 percent during this period compared to the previous year.

A household’s decision to buy a car or a consumer durable such as television and refrigerator is not as much a function of current income as it is about expectations of future income. A majority of Indian cars and relatively costly consumer durables are bought through loans. There appear to be a crisis of confidence brewing among households, who may be feeling uncertain about their ability to finance a purchase over 3-5 years.

There is also the uncertainty over the status of BS (Bharat Stage) IV vehicles after March 2020. Car makers had scaled down production of BS IV cars as India will upgrade to BS VI from the existing BS-IV vehicular emission standard from April 1, 2020.

There have also been fewer launches of new models as companies are seeking to carry as little stock as possible of existing vehicles closer to the April 1, 2020 deadline.

Consumers were also putting off purchase of BS IV cars, unclear over the resale value of these cars after April 2020. This is another reason for car sales slowing down over the past few months.

GDP, by definition, is the total value of goods and services produced in the country. Braking of car production and sales would thus decelerate GDP too, which seems to be playing out in the Indian economy currently. This explains the measly 0.6 percent growth in the manufacturing sector, from 12.1 percent in the same quarter last year.

Activity in Indian farms during April-June were also considerably muted, largely because of the delayed onset of the South-West monsoon. There’s more to the monsoon rains than the romance of pitter-patter. It is the lifeblood of Indian agriculture.

The South-West monsoon rains initially played truant, arriving in the Indian mainland with a considerable delay. Monsoon rain was deficient by as much as 33 percent in June, hindering sowing activity for the summer-sown kharif crop. The rains have gathered significant pace since, flooding many states, replenishing reservoirs. But a somewhat mixed rabi (winter-sown) harvest and weak rains in June, added with a high base effect, pulled down agricultural gross valued added (GVA) growth to 2 percent in April-June in 2019, compared to 5.1 percent in the year-ago quarter.

There was also a five-year phenomenon at work in April-June. India was in the midst of the Lok Sabha elections and with the government in transition, public spending was limited to routine expenses. Government-funded projects, particularly in roads and highways, would have slowed from April to May, until the Narendra Modi-government took oath for a fresh term.

Growth in construction GVA, therefore, slowed sharply to 5.7 percent in April-June 2019, from 9.6 percent in the same quarter last year.

The onus is squarely on the government to ratchet up its spending, particularly on infrastructure projects that have strong multiplier effect. The slowdown is here. It is official. The government will now have to do much of the heavy lifting to engineer a quick turnaround.