If the Indian Growth Story isn’t dead, it certainly is on life support. Until a couple of years back economic growth at 7-8% was considered a given. However, the country is now falling behind these numbers in a big way. The analysis of some key metrics like the GDP growth rate, Export-Import data and the Index of Industrial Production explains the current scenario.
GDP growth rate
The Indian Economy has entered a state of sluggish growth, with its slowest advancement since 2012. The country may have entered a quasi-recession with growth now slipping below the long-term trend of 6.6% for two consecutive quarters. While the standard macroeconomic definition of a recession is two consecutive quarters of shrinking GDP, a significant decline in economic activity spread across months is another often-used description.
The GDP of Asia’s third largest economy grew 5% in April-June from a year earlier and according to the Reserve Bank of India, is likely to be near this trough at 5.3% in the July- September quarter. The central bank also cut the country’s growth forecast for FY20 to 6.1% from 6.8% estimated earlier. Moody’s Investors Service cut India’s GDP growth forecast for 2019-20 to 5.8% from the earlier estimate of 6.2%. It attributed the deceleration to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation. It expects growth to pick up to 6.6% in FY21 and around 7% over the medium term.
It also highlighted the diminished probability of sustained real GDP growth at or above 8%. This is because the investment-led slowdown has broadened into consumption, driven by financial stress among rural households and weak job creation. Additionally, a credit crunch among non-bank financial institutions (NBFIs), major providers of retail loans in recent years, has compounded the problem. The private consumption expenditure growth rate saw a huge crash from 11% to 3% between the last two quarters.
Below is a chart that depicts the original and the revised GDP growth forecasts from various bodies:
In such a scenario it is imperative to ascertain whether the slowdown is cyclical i.e. simply short-lived, based on the business cycle and correctable by monetary and fiscal stimuli or whether it is structural i.e. a more deep-rooted phenomenon occurring due to a one-off shift from an existing paradigm. The causes for concern are more than superficial which gives the economic slowdown a structural bent. As a result, merely slashing interest rates and providing cheap credit to revive the economy will not suffice. Several deeper policy level changes need to be implemented in order to revive the economy.
Exports and Imports (ExIm)
Exports play an important role in the Indian economy, influencing the level of economic growth, employment and the balance of payments. India's exports contracted by 6.57% to $26 billion in September mainly due to significant dip in shipments from key sectors such as petroleum, engineering, leather, chemicals, and gems & jewellery. Out of 30 key export sectors, as many as 22 showed negative growth in September.
Imports too declined by 13.85% to $36.89 billion, narrowing trade deficit to $10.86 billion in September. Trade deficit in September last year stood at $14.95 billion. In September, oil imports declined by 18.33% to $8.98 billion, and non-oil imports fell by 12.3% to $27.91 billion. Cumulatively, during April-September 2019, exports were down 2.39% to $159.57 billion while imports contracted by 7% to $243.28 billion. Gold imports plunged 50.82% to
$1.27 billion.
High export growth rate is crucial for India’s goal of becoming a $5 trillion economy by 2025. To achieve this objective, the economy will have to grow at an average rate of 8% during the next four years. India’s exports will have to grow at an even higher rate and the current slowdown has made the objective more challenging. The Government of India must take a call on whether to join the Regional Comprehensive Economic Partnership (RCEP), the free trade grouping of 10 Asean members and their six allies. The group continues to pressure India on finalising the deal by November 4, even though several industry and trade organisations have increased the pitch of their opposition to the agreement.
The Ministry of Commerce has released a report through the High Level Advisory Group (HLAG) which presents a roadmap to double India’s exports to $1 trillion by 2025 from about
$500 billion at present. To achieve this, it suggests a slew of measures, some of which have been much talked about in the past. These include reducing the cost of capital by further lowering repo rates. However, the focus is on raising competitiveness of Indian exports. Moreover, the report makes bold recommendations on several issues traditionally considered to be risky economically and sensitive politically, such as free trade deals.
In principle, by promoting exports, free trade agreements (FTAs) can help the country move up the value chain. That, in turn, can provide India an edge vis-à-vis non-member countries. However, the fact remains that India has not gained from existing FTAs. The main culprits are the non-tariff barriers and administrative hurdles faced by Indian exporters such as difficulty in quality and specification certificates, and time-consuming custom clearances, to name a few. They have prevented Indian exporters from exploiting markets of trading partners.
For Indian exports, the logistical bottlenecks are other stumbling blocks. The turnaround time at the best of Indian ports like Kochi is two-three time longer than for Chinese ports. We come a cropper even compared to our Asian competitors like Vietnam and Bangladesh. Shipping of garments from point of origin to the nearest port can take as much as seven times longer in India than in Bangladesh, and as much as 20 times than in Vietnam.
As a result, India falls well below its potential in attracting foreign direct investment (FDI), crucial for raising exports. To a large extent, China’s spectacular performance on the export front is on account of FDI, whose share is estimated to be over 50% in China’s manufactured exports. Reportedly, many companies are considering moving out of China, since the start of the US-China trade war. However, not many are keen to relocate to India. To overcome this hurdle, the HLAG report proposes a centralised authority for issuing licences, and to empower it to grant incentives for companies meeting pre-defined criteria.
Creation of big data-driven prediction systems for Indian exports will help in identifying priority areas. In fact, big data and artificial intelligence (AI) also have the potential to serve as a source of new exports to the developed world. Councils along the lines of goods and services tax (GST) councils may be a good idea for developing logistical hubs and value-added exports of agricultural products.
Index of Industrial Production (IIP)
As the name suggests, the Index of Industrial Production (IIP) maps the change in the volume of production in Indian industries. More formally, it chooses a basket of industrial products — ranging from the manufacturing sector to mining to energy, creates an index by giving different weight to each sector and then tracks the production every month. Finally, the index value is compared to the value it had in the same month last year to figure out the economy’s industrial health.
There are two ways in which IIP data can be viewed. The first is to look at sectoral performance. In this the whole industrial economy is divided into three sectors; the first is manufacturing with a weight of 77.6 % in the index, the second is mining with a weight of 14.4 % and third is electricity with a weight of 8%. The second way to look at the same production is to look at the way such industrial products are used; this is called the use-based classification.
From a sectoral point of view, it can be seen how the growth rate in the manufacturing production, which has the biggest weight in the index, has been negative — that is, it shrank by 1.2 %. In fact, 15 out of the 23 sub-groups in the manufacturing sector showed negative growth in August 2019. The worst were motor vehicles, trailers and semi-trailers, where production declined by over 23 %, and machinery and equipment, where production fell by close to 22 %. Electricity production, too, shrank while mining production barely managed to be what it was in August 2018.
If one looks at the use-based classification in the same table, one can see the sustained shrinkage in two key groups — capital goods and consumer durables. This contraction is at the heart of what is wrong with the Indian economy at present. The decline in the production of capital goods, which is the machinery used to produce other goods, shows that there is little desire/demand in the market to invest in existing or new capacity. The decline in consumer durables such a refrigerator or a car shows that existing inventories are not yet being cleared because consumers continue to avoid buying these products. However, consumer non-durables and primary goods continued to register growth, at 4.1% and 1.1% respectively.
Conclusion
While all is not lost, there certainly are signs that prompt action must be taken. The government has introduced a slew of measures such as reducing corporate tax rates to boost investment and consolidation of public sector banks to increase efficiency. However, further policy changes will be required to enable the economy to bounce back.