Tuesday, January 19, 2021
Home Economy and Finance The Economy has slowed down but to say there is a 'recession' ahead, is...

The Economy has slowed down but to say there is a ‘recession’ ahead, is an exaggeration: Here is the way out

Overall, it is clear that the economy has slowed down and is not at its full potential growth path. However, it is wrong to conclude that it is the start of a recession which will take a long time to recede.

The recent release of quarterly data on GDP growth rate has created panic among citizens of India and that too for the right reasons. The GDP growth rate plumed to 5% for Q2-2019, which is lowest since 2013-14, an era infamous for policy paralysis and corrupt practices of UPA II government led by former Prime Minister (PM) Dr Manmohan Singh. The news of 5% GDP growth rate initiated the debate on likely reasons and that debate has refused to die down. Among all the chaos, opposition comprising Congress, Left, Liberals, and Pseudo Intellectuals were seen rejoicing over this tragic economic news which clearly indicates the Vulture nature of these groups who are eagerly waiting for the blood of PM even at the cost of dying Indian Economy. The observed decrease in GDP is termed as Recession in Indian Economy without any conclusive evidence, whereas the data suggest a mere slow down in the growth rate.

The slowing down of economy is not being contested as it is conclusive from the data released. The growth rate has declined from a peak of 8.2% in 2015 to 5% in the latest quarter of 2019. However, this decline is the start of a recessionary period, is not conclusive by the trend observed in the various parameters of the economy. For example, the consumption of petroleum products, an input to the majority of economic activities, is marginally higher in Q2-19 (54,940 TMT) when compared to Q2-18 (54,366 TMT). Similarly, cement production has increased by more than 10% in Q2-19 when compared to Q2-18. These are just a few examples, but important ones as it tracks economic activities in the core sector. Therefore, the current decline may be mere cyclical in nature, where the economy has slowed down due to various reasons.

India GDP growth (annual) (source)

Comparative quarterly growth and forecast

Lack of Demand vs. Shift in Demand

Now, let us analyze the trending reasons propagated by vulture group talked about earlier in this article. For them, it is the slow-down in Auto Sector which is the most important indicator of the start of economic recession. Let me ask them how auto sector demand represents the demand function of millions of Indian who are barely making their daily end meets. Car owning population is not more than 15% of India’s population (it was 5% as 2011 Census data) and therefore, the decline in a number of vehicles sold domestically is not an indication of the start of the recession. In fact, the highest-selling model in India are not low price cars, but hatchbacks and sedan models which costs a minimum of 6 lakh rupees on-road price. On top of that, the roads in urban space are already over-crowded and vehicle pollution is at a historic peak. In this case, the weakening of demand in auto sectors is a welcome change and government priority should have been in rapidly expanding public transport rather than providing stimulus to the auto sector. Auto sector economic loss could be compensated by overall social profit observed due to three factors i.e. reduction in loss of working hours due to traffic jams; reduction in vehicle pollution level; and net trade balance gain due to a reduction in oil demand.

Second most important argument quoted by these vulture groups is a reduction in Parley G Biscuit demand. This is complete nonsense to quote half baked data in order to suit the political propaganda of economic recession. As per the Nielson report, bigger packet biscuit and premium cookies sale has been growing in Q2-19. This probably indicates a shift in demand due to improved purchasing power and changing food preference with the rise in income. The theory of lack of demand is again busted with highest ever growth recorded in sales of smartphones in Q2-19. Smartphones are penetrating rural areas and costs between Rs. 3,000 to Rs. 15,000 for most selling models in India. This growth story itself conclusive evidence of demand being intact and therefore, the recent decline is most likely a slow-down rather than start of the recessionary period.

Potential Reasons for Slow-Down

Since there is a slow-down, there must be a reason for that. Economic slow-down is not resultant of any single factor, but the accumulation of multiple factors such as policy decisions, external factors, economic sentiments, political and economic stability. Again, the vulture group attributes this slow-down to barely twin policy decision of Demonetization and GST Implementation. Demonetization impact on the formal economy was minimal as the liquidity was always available in the form of non-cash methods. It impacted the informal economy surviving out of cash transactions. However, the impact got minimized in a quarter when the economy was re-monetized with new notes of Rs. 2000 and 500. Digital payment network expansion also helped in minimizing this impact. GST implementation had also been streamlined and especially for small traders. The informal economy is still outside the purview of GST implementation and therefore, it has not impacted the informal economy significantly.

However, a parallel economy running out of black money earned through corrupt means had a severe impact and has not been able to revive its fortune. This led to a reduction in demand from these population strata which were thriving on this parallel economy. For example, the real estate sector was infamous for investment and generation of black money through corrupt practices. This resulted in skyrocketing of prices, even though the demand by the genuine buyer was hardly increasing. Surplus black money parked into housing units resulted in an oversupply of housing units and that is clearly evident from the current prices which have not declined significantly despite oversupply maintained for almost last five years. Therefore, the slump in real estate sector is mainly due to choking of black economy which resulted in reduced construction activities and therefore, cascaded the slump to other major ancillary sectors such as iron and steel, cement, sand, brick and kiln, home furnishing, paint, and other associated industries.

If the reduction in parallel and black economy is the real reason for the slow-down of the Indian economy, it is completely justified. Rooting out the black economy is beneficial in the long run and this is a major step towards achieving a sustained growth rate for converting Indian developing economy into a developed one. No developed economy runs a parallel black economy as large as India and that is why this surgery on the black economy was long needed. The current slow-down of the Indian economy is similar to weakness observed in a cancer patient while going through the treatment. However, the treatment is necessary to prevent death and once completed, the health improves to its best. If the treatment is necessary, is it sufficient? The answer is no and therefore, additional steps should be taken to improve the health of the economy post-black money cancer treatment.

Potential Solutions

Since there is slow-down, there must be an attempt to rescue the economy from this situation. The most important step in this direction would be to increase the saving and investment rate in the Indian economy. Domestic private saving is the key to achieve this goal. The government should incentivize increasing the saving rate and investing that saving into capital formation. Expenditure into capital formation would create long term employment, enhance the competitiveness of Indian industries, increase the output and employment, and reduce the prices. Increased employment and reduced prices will result in an increase in purchasing power of individuals and therefore, boost the demand. On the external side, increased competitiveness of Indian industries will result in increased exports and thus, will reduce the current account deficit. Reduced current account deficit will help the government to continue to spend on essential infrastructures such as transportation, health, and education.

On the monetary side of the government policy, merger of banks will help in reducing the Non-Performing Assets (NPA) through better management, capital infusion, and improved recoveries. Government has to remove the fear of prosecution from minds of honest bank officials as well as honest businessmen. There is always a genuine risk with business opportunities taken and therefore, a failure in business of banking by honest individuals should be separated from wilful defaulters and corrupt practices and should be saved from harassment by prosecuting agencies such as ED, CBI, Vigilance, etc.

Conclusion

Overall, it is clear that the economy has slowed down and is not at its full potential growth path. However, it is wrong to conclude that it is the start of a recession which will take a long time to recede. On the contrary, the situation is conducive to start a new phase of growth in the Indian economy which is more formalized and more digital. The most important task for the government is to increase the saving and investment rate in the Indian economy and improve the business sentiment by removing the fear of prosecution from honest bankers and businessmen. These two steps itself will lead to achieving higher and sustained growth rate in the medium and long term.

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