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Thursday 21 November 2019

Slowdown Has Reasons Other Than GST, Demonetisation

When all economic sectors decline, the mood of the market turns sombre, turning investors all the more reluctant to pump in money; the interdependence of industries means that the sluggish behaviour of one would affect many

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The growth rate has come down to the lowest level in the last six years. Demonetisation and GST are being held largely responsible for the slowdown in the economy for the last few months. Along with the general public, businessmen believe that GST, which came into effect from 1 July 2017, has made it difficult to do business.

At the same time, people believe that the two measures did not put brakes on inflation; much as the figures released by the RBI tell a different story, the lay people complain of price rise (we will see how this perception is false later in this article). Apart from demonetisation and GST, there are many other reasons, which caused the slowdown. Industrial production reached the lowest level since August 2013 this August. Its pace has come down to 1.1%.

With demonetisation and then the introduction of GST, the growth rate started to decline. Earlier, the growth rate was 8.2%. At present, it has gone much below the growth rate of 2013-14. That year the growth rate was 6.4%. Thereafter, it increased to 7.4% in 2014-15. The growth rate reached 8% in 2015-16. It was at the highest level of 8.2% in the pre-demonetisation year ie 2016-17. After this, the government announced demonetisation.

It was too simplistic to assume that cash was a convenient tool in the hands of crooks. Hundreds of businesses in the rural landscape had not traditionally known the use of electronic money. Farmers, for example, were rarely seen queuing up in front of the ATMs in cities to narrate their woes. The urban middle class, therefore, happily carried the notion that the filthy rich alone had been dealt a heavy blow.

Post demonetisation, the growth rate fell to 7.2%. After the implementation of GST in 2017-18, the growth rate increased to 8%. However, the GST was implemented only for nine months until then.

There has been a severe decline in the economy since the first quarter of the last financial year 2018-19. In the first quarter it was 8%, in the second quarter it was 7%, in the third quarter, it came down to 6.36%. It came down to 5.8% in the initial quarter of this year and the fourth quarter of the financial year.

The decline in businesses due to demonetisation and GST almost cost the BJP the Gujarat election. If Uttar Pradesh was won, that should not have determined the central government’s economic policy. For, richer spots in the country fend for the poorer ones, too — by not only attracting manpower from the poorer regions of the country but also supplying branch offices, services and goods to the latter.

Slowdown started in 2013

The slowdown began to pick pace from 2013 onwards when retail inflation had crossed 9% during the UPA-II regime. The repo rate of RBI was 8% during this period. However, after Prime Minister Narendra Modi took over in 2014-15, the repo rate reduced to 7.5% and inflation became 6%.

In 2015-16, the repo rate was 6.5% and inflation was 4.9%. In 2016-17, the repo rate in the year of demonetisation was 6.25% in November while inflation had come down to 4.5%. GST came into force in July 2017-18, with the repo rate being 6% and inflation going down to 3.6%. Inflation fell to 3.4% in 2018-19, while the repo rate reached 6.25.

Demonetisation saw an impact on demand, which affected people’s income and resulted in loss of jobs, which economists call the “multiplier effect”. After this, imports were affected following the implementation of GST, as importers’ refunds were delayed.

As the negative impact of demonetisation and GST began to wane, the IL&FS crisis at the same time led to a crisis in NBFCs and housing finance companies. At the end of 2018, the impact of the trade war between US-China and weak business globally was equally visible in the country. The impact of this international development added to the slowdown.

Finance Minister Nirmala Sitharaman said that despite all the problems, it is the law of the country that is to be followed by all. The finance minister may have erred here, which is troubling the people, but now it is a law, which we all have to follow.

Slowdown has other reasons

Crisis in NBFC worse than reluctance of banks

With the IL&FS crisis, the liquidity of capital in the country started declining. Generally, it has a more severe impact on the market than what is caused by banks’ reluctance to disburse loans because these companies give loans to all types of mutual funds, the corporate sector, people in small towns and villages.

The crisis in the NBFC segment affected the marginalised businessmen, especially in rural areas, due to which there was a drop in demand. Banks, anyway, largely give loans to big businesses alone whereas, as the SBI said recently, there is no considerable drop in the number of loans to consumers.

Every sector affected, creating a vicious cycle

The slowdown is now ubiquitous. Industries ranging from that of auto, real estate, FMCG, readymade garments, and even the biscuit industry in the last year-and-a-half are feeling the impact. A report has revealed that $ 6,300 million worth residential projects are stuck in the country, which is worrisome for the country’s economy. The report was published by property consultant Enarock.

In September, Ashok Leyland’s vehicle sales fell by 57%. The company sold a total of 7,851 vehicles in the month of September. In the same month last year, the figure was 18,078. The vehicles which have seen the biggest decline in sales include medium to heavy vehicles.

According to the data released by the National Statistics Office (NSO), the manufacturing sector, which contributes 77% to the IIP, recorded a 1.2% decline in production, the lowest level in five years, compared to 5.2% in August 2018. Earlier, the manufacturing sector was at a low level in October 2014 when it had recorded a decline of 1.8%.

At the same time, electricity generation registered a decrease of 0.9% while, in August 2018, there was a growth of 7.6%. The growth rate of the mining sector remained flat at 0.1%. On the other hand, the capital goods segment also performed the worst, with a 21% decline in production compared to 10.3% in the previous year.

When all economic sectors decline, the mood of the market turns sombre, turning investors all the more reluctant to pump in money. The interdependence of industries means that the slowdown suffered by one would affect many. The relatively better show by online goods aggregators like Amazon, Flipkart, eBay, etc projects a misleading picture as these companies do not have the capacity to revitalise the whole economy.

Furthermore, businesses in India are failing to gauge the changing mood of consumers in an evolving market. Products like private passenger cars, no longer being in high demand in cities, must explore small towns where a family’s own car is still an index of upward mobility. There, affordability will be a greater factor than what it is in the urban landscape. The Indian phenomenon called information technology is at a cusp, as the end user’s taste is changing fast. We may soon see an era of IT experts excelling individually rather than as staff members of large organisations because a company cannot afford to invest in some new technology only to see it get outdated in no time.

Finally, all the pressure to reform the economy is on Prime Minister Narendra Modi whereas few state governments have changed their respective sluggish systems. Local governance is worse, with a single-point agenda of corporations being harassment of the business class. We live in an inspector raj; the end of licence-quota raj in 1991 looks good only on the paper. While the traders must thank the central government for NITI members’ coordinated efforts with different states to abrogate redundant laws, the attitude of local government functionaries hasn’t changed. Unless reform happens at the grassroots, which includes an overhaul, downsizing and revised training of the bureaucracy to make the babu people-friendly, any adjustment that the Union government makes will at best create media headlines and will not be felt on the ground.

The writer is a businessman who wishes to stay anonymous in media
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