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India’s GDP slows to a crawl: Is $5 tn economy a pipedream?

Author: Rajiv Singh/Tuesday, September 3, 2019/Categories: Exclusive

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India’s GDP slows to a crawl: Is $5 tn economy a pipedream?

India’s economy grew at 5% in Q1FY20, the slowest pace in the past six years due to weakness in manufacturing, agriculture, construction and mining sectors. An overall weakness in consumption also contributed to the sharp fall in growth rates.  It remains to be seen if India will meet the RBI’s growth estimates . RBI estimated that during fiscal 2020, GDP will grow at 6.9%, by growing in the range of 5.8% to 6.6% in the first half and 7.3 to 7.5% in the second half.

As of June 2019, the current slowdown has lasted for the past 18 months, the longest since 2006. While the indications of an impending slowdown were slowly cropping up around January 2018, the NPA crisis and corporate default saga aggravated the situation by making things worse for the financial services industry which resulted in evaporation of liquidity in the system. This affected two large sectors that rely on the financial services i.e. real estate and automobiles. It is expected that more than half of the decline in economic activity during the current slowdown was driven by consumption and approximately a third of the consumption slowdown was driven by slowdown in automobiles.

The slowdown was caused by a mix of both global and domestic factors. Globally, economic uncertainty caused due to US-China trade war and concerns over Brexit resulted in overall weakness which led to slowdown. On the domestic front, weakness in consumption has contributed to the slowdown. While the RBI has been on an accommodative path by reducing repo rate by 110 bps over the past four policy meetings since January 2019, banks’ reluctance to transmit this to the broader economy by refusing to cut the rates given the ongoing bad loan crisis and liquidity crunch made the situation worse.

The government had announced a slew of measures like capital infusion into PSBs, relief for FPIs on the proposed surcharge and some measures to address the problems in the ailing auto sector. Banks have also agreed to pass on the rate cuts by lowering lending rates. These measures are expected to improve the situation and boost demand. Another major positive factor is RBI’s decision to transfer Rs. 1.76 trillion to the government. This is expected to find its way into the economy as the government has the cushion to spend more to that extent.

The central government had announced a set of measures to address issues in auto sector, small businesses and eased norms that would provide more liquidity and flexibility to NBFC sector to uplift the weak consumer sentiment ahead of the festive season. Addressing the concerns of the auto sector and the financial services industry is crucial not just to improve the sentiment but also to provide the much-needed fuel to the ailing economy.

In a way, certain decisions made by the government in sectors like automobiles and its slow response in addressing the liquidity crisis in the BFSI sector has led to the current state of slower GDP growth. However, it is commendable that the government has acknowledged the slowdown in GDP growth and started fixing these issues. To address the issues in auto sector, it has announced measures like allowing additional 15% depreciation, putting on hold revision of registration fees hike till June 2020 and its decision to come up with a new scrappage policy resulted in improved sentiment. This is expected to push vehicle sales which had slumped to near two-decade low.

To provide the much needed fillip to the BFSI sector, the government has announced measures that are expected to increase transparency, better transmission of RBI rate cuts and improve overall lending environment in the economy. These measures include Rs. 0.7 trillion capital infusion into public sector banks, launch of repo-rate linked loan products to ensure faster transmission of rate cuts, NHB’s decision to provide additional liquidity of Rs. 0.3 trillion to housing finance companies and improved one-time settlement policy for MSME and retail borrowers. All these measures would not just free up the capital for additional lending but improve the overall liquidity situation in the economy.

Globally, weak oil prices despite Iran sanctions, adoption of loose monetary policy by major central banks across the globe to avert the recession concerns should improve global liquidity and keep the sentiment on a positive note. On the trade war front, our belief is that things will not turn for the worse as the US and China could find a win-win situation which could be a positive for the global economy.

Overall, while the government is doing a commendable job to improve the economic growth, these measures are incremental in nature. However, from a state of slowest growth in the last six years to making India a $5 trillion economy by 2024 calls for more structural reforms and increased government spending on infrastructure projects that are likely to have a long-lasting impact on the economy.  (The author is CEO Stock Broking, Karvy)

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