India’s current GDP stands at 5%. It is the lowest since 2013. The last time the Indian economy suffered a slowdown was in 2011. Before that, it was in 2008 when the collapse of certain financial institutions in the West caused delayed ripples here. India was lucky these past two times but economists are confident that that won’t be the case if the slowdown goes on autopilot and crashes.
When that happens is a question for another time. Right now, the focus is on the causes of why the Indian economy is treading towards a possible meltdown. This is from the point of view of an average Indian consumer and especially in the period between April 2019 and June 2019 when a lot of things got disturbed in the country.
The 7 Causes or Indicators of the Growth Recession
Thanks to the Mint, these are seven economic indicators as well as additional commentary on each of them that will shed some more light on why the Indian economy is facing a slump. These directly or indirectly impact the capital markets. Any positive change in these will immediately show a positive change in the stocks, as was observed on 20 September 2019 due to speculation arising from a change in the tax rate cuts to companies. This was executed by the government.
- Drop-in consumption – Consumers are consuming less stuff. In other words, they are not buying new cars, they are not buying new homes, they are not buying consumer products. And the blame rightly goes on the concept of ‘lack of money’. Although, ironically, retail lending by commercial banks is on the rise (to create an equilibrium now that corporates are going rogue) things do not look good from a consumerist point of view. And since consumption makes up about 60% of the Indian economy, effects are bound to be seen
- Auto slump – Unfortunately, the entire blame is being put on the decline in car sales numbers in the country. Although that is not justifiable, it still plays a role in shaping the Indian economy. The backward and forward linkages are what makes the auto industry so dynamically influential. When the industry sees a slump, so does the backward linkages that involve tire manufacturers (CEAT) and steel manufacturers (JSW). It also affects the forward linkages: car dealerships and auto loans (SBI). When things add up in a circular loop, the economy gets on its knees. The drop in two-wheeler and tractor sales is also a part of the problem
- Real estate stagnation – Aspiring buyers these days complain that the real estate is not moving; neither higher nor lower. This only adds to more empty apartments and buildings and plots. If the prices do not shoot, people don’t sell and they don’t buy. If the prices do not go down, people don’t sell and they don’t buy. This has resulted in stagnation. The real problem comes from the fact that real estate is attached to roughly 250 ancillary industries as backward and forward linkages, making it a very important factor
- Spurt in home loans – Retail lending by banks to individuals is on the rise, but the problem is: buyers are not buying directly from builders. They are buying from investors who had bought the apartments in the previous decade (before the 2008 crisis). So, the new money does not really enter the economy
- Decline in imports – This is tied to the consumption issue. People are not spending money on buying imported goods, which is a good indicator of money exchanging hands. Imports in the above-mentioned period fell by 5.3% compared to the same period in 2018
- Poor investment landscape – Things are not looking good as far as investments are concerned. Drop-in domestic auto sales, poor lending to industry (read Vijay Mallya and Nirav Modi fraud impact), poor freight movements compared to 2018, slower production of steel and other construction materials, drop in the number of investments projects announced and completed are some of the alarming features of a poor investment landscape. Some of these were worst hit in this period.
- Poor exports – Similar to the imported ideology, if exports from a country look healthy, it only contributes well to the economy. The net exports did not change when compared to 2018, which is not exactly a cause for worry. But when you add everything up, things do look unstable.
India Today suggests that the next two months will be a crucial period for the Indian economy as it will generate the output of the so-called measures taken by the government. If the recent tax rate cut for companies generating revenue less than 400 crores is any indicator to the type of measures that might be taken in the next few weeks in hurried motion, there is little hope for the economy.
Almost every expert on the topic has only one thing to say: the slowdown is real and there’s no way out. What can be done to soften the blow is a little bit more sensitivity from the government as well as India Inc. Only then can the country flow without much turbulence.
Boosting bank lending, banking upon the festive season (Dussehra and Diwali coming), and fueling investments are the only sure-shot ways to turn this whole thing around. Otherwise, it is sure that the economy will enter a state of meltdown and more than sustenance, coming out of the collapse will be difficult for everyone affected by it. But the biggest jolt will be to the market situation, factors which typically influence it are all under stress.
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