Article

Declining Indian Economy: Facing A Tough Time

 13 Feb 2020

The recent annual financial stability report released by the RBI on the 27th of December 2019 shows that there’s a structural slowdown in India.

The report says that the situation is disturbing. The IMF has guided India to take immediate action to revive the economy. Dr. Arvind Subramaniam( Cheif Economic Adviser) and Mr. Josh Felman observed that the economy seems headed for an intensive care unit.

How bad is the situation

In 1991-92, the Indian economy was facing its worst time ever. The industry growth was -9% and the GDP was growing at just 1.1%. Comparing the current situation, the industry growth is -10% and the GDP growth is 4.5%. But, looking at the past data, this growth rate is also under question.  There’s a question mark on GDP figures. It can never be 4.5% as the conditions are similar to 1991-92.

 The 2017-18 reports show that the consumer goods production growth rate was 5% and at present it’s -1%. India’s exports were 9% in 2017-18 and today they are standing at -1%.

The government may say that exports are decided by global factors. If the global market is down, global sentiment is not very conducive, it will affect our exports. But domestic factors are equally responsible. It would be naive to say that only global factors are responsible for a decline in exports.

Ease of doing business, the robustness of bankruptcy and solvency code, availability of state of the art infrastructure, electricity, these factors also decide how much our country will export. So we can’t shift our blame entirely on global factors. If our exports are declining to the extent that it has gone negative, domestic factors are to be blamed.

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In 2017-18, tax revenue was growing at a speed of 16% but if we adjust direct tax revenue for inflation in 2019-20, the growth in Direct tax revenue is 0%. It is alarming.  It means the government’s capacity to spend will be squeezed

The best parameter to evaluate the economic condition of a country is electricity generation, because every sector consumes electricity.

Data tells that growth in electricity generation is lowest in the last 30 years. In 2019-20 the growth was just 1.8%.  That means, demand for electricity will be limited, almost all sectors of the real economy will be underperforming and will get trapped in under capacity utilization. Electricity generation is directly linked to the growth of the overall economy.

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As per the reports, the unemployment level today is the highest in the last 45 years. It has affected the purchasing power, demand making capacity in the market decreasing the sale in the market.

Reasons for slowdown

The main reason for this decline in the economy is the Second wave of twin balance sheet.

When the balance sheet of the private sector is under strain and the balance sheet of banks is also negative, this is called the twin balance sheet problem.

The first wave came into existence after demonetization in 2016. It was related to infrastructure companies and public sector banks.   The second wave can be considered from 2019 when 2 more sectors were added to this list, real estate and NBFC crisis( PMC bank, IL and FS, Diwan housing).

Along with the breakdown of the financial system, the bursting of the real estate bubble intensified the effect. According to a report, in 8 major cities, the unsold houses for sale are 8 lakh crores. This amount is struck now. A huge amount of money is also spent on the maintenance of these houses by real estate companies.

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The bank lendings to these real estate companies in 2018-19 were 22 lakh crores. A huge amount was lent to these companies by banks. It has come down to 1 lakh crore in the first 6 months of 2019-20. A huge decline of 21 lakh crore. This sector can’t survive like that.

IL and FS crisis became a trigger of this breakdown. The housing sector is the real sector that consumes skilled, unskilled and semi-skilled types of workforce. That is the main reason behind the high rate of unemployment that the nation is witnessing.

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So many people have left India after taking money from the banks. This has increased the NPA.

The data further shows a disturbing image. It says that the companies pay 10.5% as interest rates on loans and the likely earnings are just 6.1% per annum.

That means companies are paying more in bank interest than their earnings, an annual shortfall of 4.4%. Companies can not survive with this huge amount of net loss.

The growing Iran-U.S. tension has increased a further risk of a disturbance in the middle east. India imports 84% of its crude requirements. The escalating conflict in the Middle East region could disrupt global oil supplies and lead to an increase in petrol and diesel prices locally. This could have cascading effects on a declining Indian economy as a rise in oil prices will affect all sections of society. A further increase in inflation can lead to a further decline in the economy.

Solutions

Dr. Arvind Subramaniam and Mr. Josh Felman’s report suggested some solutions that the government should follow to grow up the economy and eliminate the flaws in the procedures of conducting statistical surveys.

1.  Fix India’s data problem

Headline inflation says under 4% but CAG says that its more than 6%. We have to fix this data problem because if data is not fixed, it will not only create confusion but it will also discourage and disappoint investor’s sentiments. The statistical system in Australia spends 8$ per person per annum, America spends 11$, and we in India spend only 8 rupees per person per year. Obviously the quality of data matters.

Our Indian statistical systems are underfunded and they are understaffed as well. There are allegations as well that there are political interventions with regards to the release of various surveys. The unemployment survey was withheld by the government in the name of the quality of data. There were issues regarding the revised GDP figures also.

2.  Fix the financial system

There should be an independent assessment of bad loans because we have conflicting figures.

3.  Fix agriculture-as 25% of people depend on agriculture directly and it decides rural sentiments and rural demand.

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Govt. should create all India market for agriculture. E-NAM is established but it has not achieved its objective. Govt. should try to evolve a federal setup for fixing up the agriculture as it is a concurrent subject, both, states and union makes laws on issues related to agriculture and equal participation of states and union is confirmed.

4.  Don’t cut personal income tax rates just for political benefits. Only the top 4-5% of people pay income tax. To boost consumption, the govt. should focus on the remaining 95%. By decreasing income tax rates, the govt. will benefit only 4-5% of people who will not increase their consumption.

5.  Don’t increase the GST rate

 Increasing GST will have cascading effects. It will increase the market price and thereby will subside demand.

6.  Don’t blame GST

GST is the reflection of the entire economy. If the economy doesn’t perform well, the collection will below.  GST revenue will go up when the economy will grow.

7.  Increase supervision of NBFCs

8.  Shrink public sector banks. Make banking space more competitive by opening more private banks.

9.   Govt. should fund only those banks that reform themselves.

10.  Stop flip-flops in agriculture trade policy.

11.  Incentives for water conservation.

12.  Allow new genetically modified crops.

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Last and most important, India should use its diplomatic strength to convince the whole world community to mediate between the war-like conditions between the U.S. and Iran because a disturbed middle east could bring drastic consequences to India.