With more information about the state of the economy coming out, it is clear that the new government will have to kickstart a weakening economy. Clearly, the NDA is leaving behind an economy with severe problems. Industrial output has declined by 0.1 percent and manufacturing growth has hit a new low in March registering a negative growth of 0.4 percent. Consumer demand is languishing in almost all sectors.
It is already worrisome that big car makers like Maruti and Hyundai have reported that their car sales have plummeted. Even motorcycle and scooter sales have fallen in the past few months. Slowdown in car sale and low volume of sales in fast moving consumer goods and tourism show that across the board, there are signs of a slowdown. The economic slowdown is now recognized even in official circles as real and GDP growth is likely to be 6. 5 per cent in the fourth quarter (Q4) of 2018-19. Non food bank credit has slowed in Q4 also. Capital goods production which registered a contraction of 8.7 per cent in March is a key source of weakness.
The revenue collection through GST has not been as good as expected and there is a Rs 1.6 trillion shortfall when compared with the revised revenue estimate numbers for 2018-19; hence the government will not have a handful to spend specially when there is strong likelihood of a slippage in fiscal deficit. The Centre’s revenue growth is only at 6.2 per cent instead of the budgeted revenue growth of 19.5 per cent.
Even on essentials like infrastructure, there may be a cutback in public expenditure which is not going to help in the revival of the economy. India has huge infrastructural needs and it must spend on refurbishing and improving infrastructure building new roads, railways, ports and airports to increase competitiveness.
The government has acknowledged that export growth has been ‘tepid’ with a wide trade deficit of $176 billion which the next government will have to reverse. This is because we are losing out in labour intensive exports to countries like Bangladesh and Vietnam. Over the years, India’s upper hand in labour intensive exports like textiles, garments and jewellery has been eroding because labour productivity is not rising fast enough. Technical progress on the other hand has improved capital productivity dramatically and reduced the relative cost of automation. Lack of proper healthcare, skill training and education of labour as compared to countries like China means that the quality of work relative to wages of workers is not improving fast. It is also due to excessive use of contract labour that labour productivity is not rising. Unless the financial and labour costs in industry are brought down, there cannot be an increase in India’s competitiveness vis-à-vis our rivals in South East Asia and elsewhere.
India’s dominant exports are now relatively more capital intensive such as auto parts, electronics and pharmaceuticals. Labour intensity in organised sector has declined as a result which is bad news for job creation. Unless labour intensity in production goes up significantly, the organised sector will not be able to absorb the 10 million job-seekers a year.
Most important is the health of the banking sector. There has been a severe credit crunch for medium and small scale (SMEs)industry because of the problem of NPAs in the banking sector. India still has among the world’s worst stressed asset ratio and soured credit as a share of total loans. According to RBI, this ratio has shrunk to 10.3 percent in March from 10.8 per cent in September. Public sector banks account for nearly 90 per cent of NPAs.
The banks have not yet been nursed back to health even though $28 billion has already been injected over the past two years in the banking system. Bank credit growth has somewhat accelerated in the past few months but the aggregate credit growth is still weak.
The shadow banking companies or the NBFCs (Non-Banking Finance Companies) are still in trouble. They have been cash strapped since the IL&FS crisis making it difficult for SMEs to borrow from them. The NBFCs provide credit to retail trade also. The SMEs need capital at reasonable cost. Retail market also needs loans to sustain consumption growth and low cars sales is a result of NBFC problems. Their borrowings of short-term funds from Mutual Funds has dried up to a great extent due to investors’ concerns about the financial health of mutual funds as they hold $46 billion debt issued by NBFCs. Many investors have already exited. The shadow banking companies are also struggling to raise funds from the market but demand for NBFC bonds is dwindling after the IL&FS fiasco.
The doors of wholesale debt market are thus virtually shut and NBFCs are looking at other sources of funds such as External Commercial borrowings or selling down assets. Even the AAA rated NBFCs are only able to raise funds at a higher cost today—paying 100 basis points more than the market rate.
Interest rates have been reduced twice in recent times by the RBI, but the ‘real’ (minus inflation) interest rate still remains high. Steeper interest rate cuts will bring down borrowing costs of NBFCs and corporates. The new government may have to pump prime the economy which means giving both fiscal and monetary stimulus to raise private investment from its current stagnant level. Agriculture needs urgent attention also — which is another story.
The author is a Senior Fellow (Associate) with Observer Research Foundation’s Economy and Growth Programme. Views are personal.
This article was first published on ORF.