A crashing economy

by December 27, 2019 0 comments

2019 will be remembered for a lot of things, but the state of the Indian economy should be front and centre

Warning signs have been there for quite some time. Ever since demonetisation and the impact of the war on black money, consumer confidence has taken a hit.  Thus, economic growth was almost certain to take a hit as well. The last few months of 2018 was a warning sign of things to come in 2019. However, what nobody in Government or Indian business was warned about was the complete and utter collapse in consumer and corporate confidence — a fall in car and motorcycle sales becoming the most telling proof of the slowdown in growth. Several economy watchers may argue that the Indian economy has actually shrunk when one factors in the collapse of the real estate market, much of which was propped up by black money. Of course, cheap property is not a bad thing for consumers but the real estate market was a black hole for many Indian corporates, many of whom had illegally diverted funds with hopes that good times would continue. As the bubble burst, Indian banks discovered that loans forwarded worth hundreds and thousand crores of rupees remained stuck in the real estate. Despite the Reserve Bank of India (RBI) reducing rates and the Finance Ministry trying all sorts of inducements, banks became wary of lending. The inability to pump more funds into the economy meant that the patient did not get enough medication for a prompt recovery.

There are a couple of things about the economic slowdown that are a bit depressing. The fact is that this slowdown has occurred at a time when the global economy has been relatively steady. The American economy despite (or because of) Trump’s trade tirades is still growing at a decent pace, as is China. The second fact is that the Government seems to lack in-house expertise that can effectively repair the economy. This has meant that jobs growth in the country has been poor. This is not something that a nation, where one million youth join the job market every month, can afford. That said, the Government and the industry are set to enter 2020 with some renewed hopes. Banks believe the worst is behind them and that there will be no further shocks in the books in the coming year and decade. This should mean that banks, particularly public sector banks, who have been hesitant to forward money to companies and, thus, delayed investments by companies, should start lending money once again. The Indian automotive sector, whose woes have encapsulated the issues of the overall economy, believes that growth will come back on track by the middle of the next year.  Several issues such as the implementation of the Goods and Services Tax (GST) and the move to a new emissions standard from BS-IV to BS-VI will be in place.  Sales should come back on track, albeit, most industry watchers feel that it will take a couple of years to recover to that of 2017 levels.

Of course, we are still being hopeful. For, there are several errors that the Government can commit and, thus, jeopardise the return of growth, not least of which is to tinker with both direct and indirect taxes that could lead to even lower levels of consumer confidence. India’s 300-million middle classes, which were supposed to be the driver of the economy, appear to be ephemeral. Growth is being driven by a small elite of taxpayers. The risk of capital flight is a real one. The withdrawal of companies like Vodafone from India will send a horribly negative sign to foreign investors. Policy-makers should not pretend that India is an attractive market that investors cannot ignore. They can ignore and without huge amounts of foreign investment, India might find itself in a very poor position. Sure, there is an imperative to tax companies and lift millions of Indians out of poverty but the Government must be careful that it does not go too far and repair relations with global investors. The coming year will be critical in more ways than one. Because this is India’s last chance at becoming a major player in the global economy. Already, it is unlikely that the country will be able to achieve Prime Minister Narendra Modi’s vision of becoming a $5 trillion economy by 2025 but if there is to be any hope of making it big, it is literally now or never.

(Courtesy: The Pioneer)

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