An Antidote to Economic Slowdown

An Antidote to Economic Slowdown
In the last quarter of FY 18-19, India logged 5.8% growth. Some economists expect the GDP for the first quarter of FY 19-20 to be lower than 5.8%, suggesting that there is a structural issue with the economy. India’s economic engine is stalling. What can get it revving up?

There’s been much ado about food company Parle’s falling biscuit sales. But for the Mumbai-based company and others like it, the cookie does seem to be crumbling. As Parle’s rival Britannia Industries’ CEO said, rural consumers are “thinking twice” about buying a 5-rupee biscuit pack. Logically, low-priced snacks like biscuits ought to be the last item on the shopping list to get knocked off when consumers start tightening their purse-strings in anticipation of harder times. The fact that Parle and Britannia are feeling the heat—with the former even considering laying off workers—suggests the slowdown has been with us for a while.

The last quarter of FY 18-19, India logged 5.8% growth. India’s statistics keeper, the CSO, will be releasing the GDP data for the first quarter of 2019-20 on August 30 (after Synergia Insights goes to print), but some economists expect the number to be lower than 5.8%, suggesting that there is a structural issue with the economy. That shouldn’t surprise anyone. After all, the India economy has been caught in a perfect storm. First, there was the demonetization of 500 and 1000 rupee currency notes that inflicted a severe shock on an economy that was traditionally cash-dependent. Announced suddenly on November 8, 2016, the decision made small and large businesses seize up as the cash that oiled their engines disappeared. Then,  starting July 2017, India moved from a complicated tax regime to a simpler Goods and Service tax framework. A much-delayed-and-needed move, but it has upended thousands of small businesses whose only source of profit was the tax not paid to the government. They are hard-pressed to compete in a regime where tax breaks can be claimed only when you are part of a legitimate supply chain.

As if these shocks to the system weren’t enough, large non-banking finance companies started to fail. IL&FS, the biggest of them, had built an empire on debt, but with most of its projects hanging fire and no cash flow, it simply collapsed. Dewan Housing Finance Ltd, another NBFC, also defaulted on its payments. As a result, the suppliers of credit in the economy—which includes already-stressed banks and NBFCs—have locked up their wallets. That, in turn, has made businesses slow down their plans, resulting in job losses and wage stagnation (relative to inflation). Rural wage growth in FY19, for example, was less than 5% compared to the once-robust growth of 27.7% in FY14. And that’s how the biscuits are simply spoiling on shop shelves.   

Amidst all that, the government decided to increase the tax on India’s super-rich and foreign portfolio investors. The equity investors read the move as a throwback to India’s socialist era, when to be rich or to make money was considered sinful and hence needed to be punished with high taxation. The government’s intention may have been to use the extra tax collection for the benefit of the poor, but no country has managed to make the poor rich by making the rich poor. The fact that there’s also a massive US-China trade war being staged in the background is only adding to investor jitters.

The fact that the government didn’t quite anticipate things to play out this way was evident when on August 23 Finance Minister Nirmala Sitharaman announced a slew of moves aimed at soothing frayed nerves. The surcharge on gains of FPIs and domestic investors was withdrawn, the higher tax on short-term and long-term capital gains was also withdrawn, and the auto industry (reeling from its worst slowdown in years) was given sops that would encourage new purchases both by the government and individuals. 

The Finance Minister’s decision is unlikely to set the economy galloping, but what it does is to improve the sentiment, even if just a bit. Putting the economy back on track will take a mix of short-term and long-term measures, which address both procedural/regulatory impediments in the way of industry and structural issues like dwindling private sector investment, household savings and jobless growth. The ideal solution would be for the government to take the lead in reviving investment. There’s much infrastructure—be it roads, airports or utilities—that the country needs. The government could announce a few to get the engine humming again. Of course, the government’s own finances are severely constrained. But at Synergia Foundation, we believe that there’s nothing like good old-fashioned dose of public spending to turn things around. 

Large private sector companies—especially in telecom and auto—are under stress. These are vital players for economic well-being. We cannot afford another Jet Airways to go down in either telecom or auto. What’s needed is a government-industry partnership to find solutions to the challenges that face the country. By rolling back punitive taxes, the Finance Minister has already shown her willingness to fix what isn't working. It’s just a matter of taking another step or so to engage industry and other financial market stakeholders in a meaningful dialogue to find solutions that work for both the government and industry and, therefore, the economy as a whole.