There is little doubt the Indian economy is in distress. Nearly all major economic indicators underline the concern. Take, for instance, the slowdown in the Rs 8.3 lakh crore automotive sector, widely regarded as a bellwether industry. Auto sales (across all categories) have slumped to a nearly two-decade low. The downturn in this sector, which directly or indirectly employs around 32 million, is evident from the closure of over 300 dealerships of various auto makers across the country. Companies such as Ashok Leyland and Tata Motors are closing factories to prevent a build-up of inventory. Maruti Suzuki, meanwhile, is terminating temporary workers as sales drop.
India’s factory output growth rate, as measured by the Index of Industrial Production, slowed to two per cent in June 2019, down from seven per cent in June 2018. The slowdown is clearly visible across multiple industrial sectors-for instance, the manufacturing sector’s growth rate slid to 1.2 per cent in June 2019, falling from 6.9 per cent in June 2018, while the mining sector grew at a tepid 1.6 per cent, a sharp fall from 6.5 per cent in June 2018. Crisil, a ratings agency, recently scaled down India’s GDP growth projection for the current fiscal to 6.9 per cent from the 7.1 per cent it had projected earlier.
Even agriculture, a sector that is still the largest employment generator in the informal economy, continues to be in distress. For 2018-19, growth in agriculture and allied activities was estimated at 2.7 per cent, down from five per cent in 2017-18.
Data also suggest that India’s socio-economic disparity has worsened in the past few years. An Oxfam survey published in January 2018, for instance, showed that India’s income inequality has increased. In 2016-17, India’s richest one per cent held 58 per cent of the country’s total wealth. In 2017-18, the same group took home 73 per cent of the wealth generated in the country, with their total wealth increasing by Rs 20.9 lakh crore, roughly equivalent to the central government’s 2017-18 budget.
But while the numbers seem to present a picture of an economy in which Indians are struggling to find and keep jobs, leave aside earning and spending more, the India Today Mood of the Nation (MOTN) poll shows popular perception swinging the other way. Indians see themselves as better off now than at any time in the past decade or so. An overwhelming 60 per cent of the respondents polled said the economy is better now than it was during the tenure of the past Congress-run government. This score has increased by 11 percentage points since the previous survey carried out in January 2019, recovering the ground lost in the four consecutive decreases from August 2017 to January 2019. Forty-five per cent of those surveyed, up by 5 percentage points over the previous survey, said that their income and savings had improved. Seventy per cent said India could become a five-trillion-dollar economy in five years, though half of them were of the opinion that the government needs to carry out sweeping reforms to achieve the target finance minister Nirmala Sitharaman announced in the Union budget presented this July. The thrust was on infrastructure development, which will require Rs 100 lakh crore in investments over the next five years.
However, several of India Inc.’s leading voices have raised concerns over the economic slowdown. Recently, addressing shareholders at his firm’s annual general meeting, HDFC chairman Deepak Parekh said there was evidence of a slowdown in the economy, which was reflected in the lower GDP growth of 6.8 per cent in fiscal 2019. He also said that risk aversion was visible in the system, with non-banking finance companies not getting enough funds to lend. However, he also said the slowdown in consumption would be ‘temporary’. Adi Godrej, chairman of the Godrej Group, warned that economic growth would be impacted if the “rising intolerance, social instability, hate crimes, violence against women, moral policing, caste- and religion-based violence and other sorts of intolerance rampant across the country” were not contained to ensure social harmony.
Tackling the Business Slowdown
To achieve its stated aim of growing the Indian economy to $5 trillion by 2025, the Narendra Modi government needs to attract major investments into the country. India needs to grow at a nominal rate of 12 per cent to reach that target, but the mood among investors suggests that a problem is brewing, one that may result in the economy slowing down even more than currently projected.
A recent report by IHS Markit, a London-based research firm, suggests that business sentiment has soured dramatically. According to the report, business activity expectations in India fell to their lowest reading since the survey began in 2009. This implies that business confidence is currently even lower than in the years when the economy was stuck in a policy paralysis under the UPA government. And the reasons for the plummeting optimism are familiar-companies worried about the slowing economy, uncertain public policies, weak sales, rupee depreciation, the lack of skilled labour and even water shortages. Only about 15 per cent of the private sector companies surveyed in June projected output growth in the year ahead.
However, the MOTN survey revealed a totally different perception of business activity on the ground. Fifty-four per cent of those surveyed said that doing business in India had become easier, up from 44 per cent in January this year. This is a substantial increase over the previous survey, with not much difference seen in opinions across occupations. About 39 per cent of respondents also said that it had become easier to get loans from banks-a somewhat surprising result considering the immense churn the banking sector has gone through in the past two years, with the crisis further aggravated by the pain in the shadow banking sector. Non-performing assets (NPAs) at commercial banks amounted to Rs 9.34 lakh crore in March 2019, with public sector banks accounting for well over three quarters of that figure. These staggering NPAs had led banks to tighten their purse strings, cutting back on lending. However, as mentioned earlier, the Modi government has been striving to improve the ease of doing business in the country. On that note, there is some cheer-the World Bank Ease of Doing Business Report 2019 showed that India had jumped 23 positions against its rank in 2017, rising to 77 among the 190 countries ranked.
The government is also alert to the slowdown in the economy. Reports suggest that a stimulus package may be announced soon, with the finance ministry working on a proposal that includes a slew of measures ranging from tax cuts, subsidies and other incentives. According to sources, the package will not only aim to reduce the cost of doing business, but also outline procedures to further improve the ease of doing business. According to reports, a separate package is also being considered for the auto sector, whose representatives recently met with the finance minister. Industry leaders in that sector have sought a lowering of GST rates on automobiles to bolster demand and the introduction of a scrappage policy to incentivise new purchases. The Centre has already reduced GST on electric vehicles.
A Question of Jobs
The MOTN polls conducted over the past five years have regularly showed jobs-or the lack of them-topping the list of Indian concerns. This time around as well, unemployment remains a pressing concern, with 35 per cent of those polled rating it as the one issue that concerned them the most. Farmer distress (16 per cent), corruption (11 per cent) and price increase (10 per cent) were other major points of concern. Even so, nearly 66 per cent of those who believe India can become a $5 trillion economy in the next five years said the budget presented a credible plan for the economy, with 46 per cent saying it does enough to create jobs. However, the jobs debate in India is complicated by the fact that while one set of data indicates a crisis, another suggests that job creation proceeds apace.
The Employees’ Provident Fund Organisation data-one barometer of job creation in the formal sector-shows job creation at its highest pace in January 2019 from September 2017 onward. However, critics argue that the EPFO data is not a real measure of jobs generated or lost. According to that measure, net employment generation in the formal sector touched a 17-month high of 0.89 million in January. On the other hand, a data leak from the National Sample Survey Office’s job survey for 2017-18 showed a spike in the unemployment rate to over six per cent-a 45-year high. In response, the government, describing the leaked report as ‘a draft’, argued that this data does not reflect the jobs created in the informal economy.
Whatever the result of that debate, unemployment remains a pressing concern. And in response to a question about what exactly the Modi government should do to create more jobs, 48 per cent said that public sector employment should be expanded. Twenty-two per cent were of the view that the government should incentivise the private sector instead, say, through tax breaks. Twenty per cent plugged for start-ups, saying that it was this sector that should be given government support.
On a related note, the direct transfer of subsidies to beneficiaries seems to be working. To a question on whether they received their cash entitlements from government welfare schemes (gas subsidy, widow pensions, PM Kisan funds, etc.) easily and on time, a majority of the respondents-59 per cent-replied in the affirmative.
What did the public feel about the Goods and Services Tax (GST)? As many as 28 per cent of the respondents said they had gained from its implementation, which is the ‘highest score for gain’ in the previous four surveys. However, an equal number said they had lost out as a result, with 35 per cent saying nothing had changed for them as a result of the new tax regime.
The GST has gone through several changes since its introduction, the latest revision being the reduction of rates on electric vehicles from 21 per cent to 5 per cent and from 18 per cent to 5 per cent for chargers and charging stations for such vehicles. However, as many as 61 per cent of those surveyed felt that GST needs to be further simplified. Experts say that even two years after GST was implemented, there are still issues with claiming refunds and mismatches in filed returns, with many businesses still not complying with the law due to a lack of awareness/ clarity on rules. Moreover, compliance costs have soared as a result of the additional staff required to maintain accounts and submit paperwork.
At the end of the day, the government has come to power at the Centre with a brute majority. This offers an opportunity to bring fundamental changes to the Indian economy, and to address structural problems. As per the results of the survey, public perception is in the government’s favour. This ‘feel good factor’ should be capitalised on to implement measures that spur demand, improve money supply, boost exports and jobs and bring the economy onto a growth path, leading to a robust recovery.