Five factors that worsened the economic slowdown

India's economy toppled to 5 per cent GDP growth rate—a 25-quarter low—during the first quarter of 2019 fiscal. Days before the data was published, the government took a step back to announce rescue measures to revive the sectors hurt by the economic slowdown and reverse decisions on surcharge for high net-worth individuals. The finance ministry's stimulus package was aimed at addressing two main concerns of the Indian economy—fall in consumption and private investments.

Now, wading through the middle of a slowdown-hit economy to the festive days ahead looks like a long swim. Though the government measures have provided some relief to a monsoon deficit year to smaller enterprises and traders, the larger concerns over 'structural issues' ailing the Indian economy continue to bite.

A worsening US-China trade relations has not helped matters for exporters and manufacturers. The RBI, in its last monetary policy statement, had cautioned that over the months this factor would weigh on the Indian economy. This, however, is not the only reason why the economy is slowing down.

Economists within and outside the government are divided on their opinions about how we reached the 5 per cent growth rate. Here are a list of top five things on which experts and multilateral organisations are in agreement about what contributed to the current slowdown:

1. Demonetisation

The one-time cash curtailing exercise of the government had a telling impact on India's growth. "We would come to know about the true impact of demonetisation only after some years," Arvind Subramanian, former chief economic adviser who had shepherded the demonetisation move of PM Narendra Modi, had said while announcing that demonetisation had no short-term impact on the economy.

Market experts say that the November 8, 2016 event initiated a curtailment of consumer spend in the country. "The demonetisation hit farmers the most. Their crop prices crashed during the year and exacerbated an already existing farm distress scenario. With no cash in hand, farmers settled for distress sales," said Siraj Hussain, former agriculture secretary and now a senior fellow at the Indian Council for Research on International Economic Relations (ICRIER).

Experts suggest that a hit on farmers’ income levels had triggered the snowballing effect of slowdown in the Indian economy. “The rural market started to stagnate at first and then growth started to decelerate for most companies catering to the rural markets,” said Himanshu, professor at the Centre for Economic Studies and Planning of Jawaharlal Nehru University (JNU).

Agri-experts say that the situation still remains the same with agriculture growth dropping to 2.4 per cent of GDP from 6.2 per cent just four years back. "The structural issues in agriculture continue to haunt even though hike in crop MSPs were announced by the government regularly," Hussain added. Absence of infrastructure such as irrigation channels, power, roads and markets continue to hurt rural growth. Income levels would not improve unless these are addressed first, he explained.

2. Consumer demand slump

One of the main concerns for the current economic slowdown is a sharp fall in consumer demand as witnessed by most major firms. India is still a rural-centric economy, the proof of which was witnessed this time. As the rural economy slowed, tractor manufacturers and fertiliser manufacturers felt the first impact.

Soon, it was pretty much everyone and sale of fast-moving consumer goods also took a hit in rural markets. “These are markets like small towns where consumption has come down drastically,” said Gagan Shawney, chief financial officer, Procter and Gamble India. “We are yet to see any recovery in sales numbers from these areas as yet,” he adds, hinting that the slowdown is yet to thaw.

GST and other tax reforms of the government after demonetisation also progressively drew away dispensable cash from people’s hands.

Earlier, TCA Anant, former Chief Statistician of India, had rued the fall in household saving numbers. “People were saving less before demonetisation and the household savings rate had dropped further after demonetisation,” Anant had said warning about early indicators of a slowdown to then finance minister Arun Jaitley.

“The government recognises that consumption will have to be given a boost,” Nirmala Sitharaman had said while announcing stimulus measures for auto makers and small and medium manufacturers last week.

3. Real estate slowdown

Of all the things that hurt India’s GDP, a slow down in the real estate and construction sector have had the worst impact of all. The construction and real estate sector, credited to account for 40 per cent overall jobs, had seen the worst last four years, with business being slower with each passing year.

In the April-June quarter of 2019, growth in the real estate sector fell to 5.7 per cent, compared to 9.6 per cent in the same quarter last year. Developers said that their vacant inventories are still large and that their businesses, too, had shrunk. Government spending on affordable housing and for other real estate and construction projects is much lesser than what has been announced.

The government had earlier gone slow on infrastructure spends to make headroom for adhering to the fiscal deficit target for the year. Fiscal deficit was systematically brought down from 6.2 per cent of GDP earlier in 2015 to 3.3 per cent for the financial year 2019-20. This, in turn, has affected the real estate and the construction sector who rely on government contract awards for business.

“Employment in construction sector has gone down by abut 30 per cent in the last one year. Projects are lesser and wages too, have remained the same in the last two years,” said Sanjay Dutt, CEO, Tata Realty.

At the same time, migration of agri-workers to cities seeking jobs in the construction sector, however, has only gone up, the labour movement data for Labour Migration Index of Centre for Monitoring of Indian Economy (CMIE) showed.

4. Lesser jobs

A drop in number of employment and wage levels have hastened the slowdown and the slump in consumer demand. Fewer jobs have been reflected in the Periodic Labour Force Survey (PLFS) for 2017-18 by the National Sample Survey Office. It also recorded a mere five per cent rise in regular jobs, which provide more social security.

Instead, a rise in number for seasonal employment to about 20 million jobs was cited by the government from rise in number of provident fund accounts. But all is not well in the job scenario. Automakers like Toyota, Hyundai, Mahindra and Maruti have slashed more than 350,000 jobs, while steel makers like Tata Steel and other large industries are operating their plants at sub-level capacities.

The fact that more than 25 lakh applicants applied during a recent recruitment drive to fill up 10,000 vacant posts in the Indian Railways gives a clearer picture of the unemployment crisis. In the budget, the government has promised more jobs in railways and judiciary. “India has one of the youngest demography at 28 years, yet we are unable to bank on this demographic dividend given the fewer number of jobs available. The slowdown have adversely affected an estimated 60 lakh jobs in the country’s housing, construction and real estate sector,” a SBI Ecowrap research report said after the release of the first quarter GDP numbers.

“Significant deceleration in growth of GDP of 'financial, real estate and professional services' within services sector from 9.5 per cent in fourth quarter (of FY19) to 5.9 per cent in first quarter (of FY20) indicates that the current problem is of inadequate demand and it is propelled by a low wage growth (professional services constitute 75 per cent of the 'financial, real estate and professional services'),” the SBI report said, highlighting the impact of slowdown on demand for professional services.

5. Lower investments

This is the final nail on the slowdown coffin. Investments are key to more business activities, resulting in more jobs, higher earnings and eventually higher spending. This virtuous cycle of investments is the key focus of this year’s Economic Survey as well and is credited to be the central of the government reforms.

Investment levels have bottomed out in the last two years as foreign institutional investors (FIIs) marked an exit from the Indian stock markets. “FIIs have withdrawn about 15,000 crore from Indian markets in 2018-19. With the festive season going on, there could be a recovery in the markets, but that would not happen in a hurry,” Brian Coulton, chief economist, Fitch Ratings said in a recent report.

"A poor consumption outlook is likely to result in businesses holding back on their investment plans. Additionally, despite possible supply chain relocation out of China providing some support to India's exports outlook, slowing global demand exacerbated by the ongoing US-China trade war will likely cap near-term growth prospects in this component," the Fitch report said, while cutting India’s GDP growth expectation this year to 6.4 per cent from 6.8 per cent earlier.

The data by the Department of Industrial Policy and Promotion of the Commerce ministry on FDI showed that investments of mere Rs 67,000 crore were promised by foreign investors between January and March this year. The number is one per cent lower than the investments in the comparable period last year.

“We would need investments to revive. For that a number of measures need to be undertaken, including the government ramping up its own investments in building public infrastructures and other assets,” said Dharmakirti Joshi, chief economist, CRISIL India.