Millennium Post

The ailing economy

With fewer new projects, unemployment and a precariously-held private sector, Indian economy portrays numerous signs of a gradual downturn

The NDA government may have scored well in the socio-political front and caught national and international limelight by abrogating Article 370 of the Constitution to redefine the state of Jammu & Kashmir, but the country's economy is in shambles. It needs immediate repairs. Unless the government acts fast and controls the damage, the economy may shrink further inviting major social consequences. Tens of thousands of jobs are on the block as an unprecedented demand recession has hit a number of sectors, led lately by the automobile industry.

Globally regarded as an engine of growth, India's automobile industry is suddenly exposed to a massive recession after an eight-year growth run. Other organised sector industries, including those under the benchmark core sector, are slumping. Sales of goods are nearly static. The latest devastating flood in generally high spending states such as Maharashtra, Karnataka and Kerala is bound to divert a lot of money from government development projects to flood relief and refugee rehabilitation.

Further, the lacklustre 2019-20 budget, which is lofty in long-term vision but stunted on immediate growth objectives, is practically devoid of short-term investment programmes in projects to help improve the country's industrial growth, by creating new jobs, generating more income, driving expenditure as also saving. India's well managed state-owned companies are under the threat of the state itself of getting their assets stripped to cover the budget deficit. Nothing is growing visibly, except the government. Maybe, it is high time that the government bifurcates its attention between political matters and economic exigencies.

According to the latest reports, the prospect of job losses in the auto sector alone is nearly 10 lakhs. This is due to the fall in the sales of cars, motorcycles and scooters. Many companies are reportedly forced to shut down factories for days and axe shifts. Automakers, tyre and tube producers, parts manufacturers and dealers have laid off a large number of workers since April. The industry's plight was recently highlighted by the Automotive Component Manufacturers Association of India (ACMA) and the Society of Indian Automobile Manufacturers (SIAM). ACMA's director-general Vinnie Mehta said that the sector was experiencing a severe "recessionary phase".

Behind the demand slump in the auto sector is the ongoing recessionary trend in several other areas and growing sickness of industries, especially of steel, coal, engineering and certain locally made white and brown goods. According to Liases Foras, a real estate research company, India's top 30 cities had 1.28 million unsold housing units as of March 2019. The real estate sector is known to have forward and backward linkages with some 250 ancillary industries. A good time for real estate business means an equally good time for sectors such as steel and cement to fittings, furnishings and paints, among several others.

Conspicuously, this is not something that is happening all on a sudden. Already, India Inc's first-quarter results are worst in the last three years. Market analysts have warned of a gloomy festive season, this year. Companies are streamlining their ad and marketing expenses. New data shows few announcements of new projects in both the private and public sector, indicating a further deepening of investment slump in the coming months.

The Centre for Monitoring of Indian Economy (CMIE) said implementation of investment projects worth Rs13 trillion has been stalled — the highest value since it began compiling data in 1995. The overall stalled projects and the rate of the holding-up of new projects shot up in June 2019 quarter. The data shows that private sector projects are being stalled at unprecedented rates. The rate is calculated as a percentage of the total projects under implementation so that the values are comparable across time. The stalling rate of private sector projects, which has hovered above 20 per cent since the September 2017 quarter, reached an all-time high of 26.1 per cent in the June 2019 quarter. Within sectors, the manufacturing and power sectors suffered the most. They along with the service sector contribute to 92 per cent of the total stalled projects. Investor's appetite seems to have also been affected by the economy-wide slowdown. The economy is now in a much worse situation than it was at the beginning of the year, show several high-frequency indicators.

Surprisingly, there is no indication as of now that the government and its NITI Aayog are really concerned about the country's steady economic downturn and stalled projects. The lack of new industrial investments, stalled projects, demand recession, slowdown of savings, shrinking business confidence and massive job losses of close to 50,00,000 men alone between 2016 and 2018 (as per a study report by the Centre for Sustainable Employment of the Azim Premji University) are principally responsible for the current situation. The GDP growth from January to March 2019 slowed down to 5.8 per cent. It may have slowed down further during the April-June period.

Unfortunately, the finance ministry and its department of economic affairs are conspicuous by their silence on such vital issues as rising unemployment and growth slowdown. Only large fresh investments, especially in the infrastructure sector, can produce a miracle. And, this can be taken up only by the government. It will be a big mistake to rely on the private sector, which is almost neck-deep in debt and some of the large family-controlled companies are selling portions of promoters' stakes to foreign entities to keep floating. Large government spending will mean higher budget deficit, state borrowing and temporary inflation. Few development economists will disagree that higher budget deficit and inflation for higher GDP growth are a much better option than economic deceleration and unemployment. No other country appreciated this part more than the People's Republic of China. The world's second-largest economy has been pumping enormous government investments in infrastructure year after year to grow its GDP and jobs.

(The views expressed are strictly personal)

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