Economic news has been increasingly dismal for some time. The decline in economic activities since January-March 2018 accelerated this year, gathering pace in recent months and prompting concern it could turn into a recession. Some commentators argue the economy is in a recession; others disagree, saying growth is decelerating. Since recessions are defined as periods of negative real gross domestic product growth (two consecutive quarters of decline is a thumb rule) in real gross domestic product, the Indian economy is not in a recession. The real GDP metric is considered too narrow by many researchers who prefer using a wider set of economic activity measures to determine recessionary trends, for example, the National Bureau of Economic Research, which documents recessions in the United States of America, focuses on a comprehensive set of measures such as unemployment, income, sales, and industrial production. The latter approach also merits use because of a long lag in GDP data publication and instances when deceleration gains momentum, as is the case in India right now. Analysing a range of measures provides a better grip on recessionary trends as we see here.
Regular unemployment and aggregate sales data are unavailable, but several high-frequency indicators exist. Many show contractionary tendencies; some recent, others more established, with pervading and deepening signs. Manufacturing is the worst, but services are not far behind.
Briefly, August industrial production contracted; export growth shrank in three of last four months, deepening from August; import (non-oil, non-gold) growth has been negative for two quarters, intensifying recently; services’ purchasing managers’ index contracted last month; other services’ indicators, for example, commercial vehicles, grew negatively throughout 2019, air-cargo-rail passenger traffic from April, housing sales and new launches fell -25 per cent and -45 per cent across nine cities last quarter; September GST collections were -2.67 per cent, corporate revenue grew 1.4 per cent. On the financial side, bank credit growth slowed to 8.7 per cent end-September (14 per cent in January-March 2019), spread across industry and services. Aggregate financial flows from banks and non-banking financial companies to commercial sector decreased by shocking magnitudes in April-September 13, 2019 compared to the corresponding period last year. Core inflation pressures continue subdued. Corporate earnings are falling; September quarter performance reportedly worsened — Nielsen estimates the fast-moving consumer goods market slowed to 7.3 per cent (16.2 per cent last year), rural market growth was a seven-year low (5 per cent) and one-fourth of that last year.
Spreading signs are evident: more than a year-long contraction in passenger vehicle sales extended to regular production cuts, job losses/reduced working hours, to the component/ancillary supplier-firms, diesel consumption (growth at a two-year low last month), the toll gates’ traffic and so on. Unemployment was reported higher on trend basis by the NSSO and the Centre for Monitoring Indian Economy surveys.
The broad-based contraction is a gloomy portend. Explanations of its underpinnings abound with no consensus. A sense can be had from the behaviour of aggregate demand components, namely, investment and consumption. Private investment, which collapsed in 2012-13, has never recovered since; the shortfall was replaced by public investment from 2014-15. Private consumption got a real-income boost from the positive terms-of-trade with the oil-commodities bust in late 2014. As that impulse faded, growth rapidly descended from peak 9.3 per cent in April-June 2016 (one quarter before demonetization) to 5.9 per cent by April-June 2017. Thereafter, two props drove private consumption: a 15 per cent growth in government spending accounted for 23.4 per cent of FY18 GDP growth (7.2 per cent); credit extended by NBFCs — a phenomenal 21 per cent loan growth over an average 16.5 per cent the preceding two years. Government spending growth moderated to 9.2 per cent last year, while NBFC lending slowed to 18.6 per cent, pulling down FY19 growth to 6.8 per cent. Both these drivers fizzled out this year: fiscal resources have shrunk; financial sector stress has spread from banks to non-banks, triggered by NBFC defaults.
At the heart are the strained banks, chiefly public, overladen with non-performing assets that festered from lack of timely resolution, inadequate recapitalization necessary to repair and restore financial health. Their borrower corporate counterparts still remain overleveraged as monetary policy never eased and/or transmitted sufficiently to lower interest costs. Banks concentrated on strengthening balance sheets, lending retreated and the credit channel blocked, aggravating the situation. The NBFCs filled the lending vacuum, rapidly stepped up loans, including for consumption; this reflects in the jump in households’ liabilities in last two years. Fiscal policy compounded this state of affairs: revenue and capital spending was sustained through extra-budgetary borrowings, which crowded out the private sector, pushed up interest rates and negated monetary policy. As a result, the corporate debt overhang persists; indebtedness now extends to households; both banks and non-banks are strained; and fresh NPAs have again begun accrue.
The key takeaways are: one, the economy never emerged from the 2012-13 slowdown; good luck and fiscal-financial props sustained consumption in the post-2014 period. Two, policy-induced distortions combined with banking sector neglect to build up further financial vulnerabilities, defuse policy tools and foreclose options. Three, the lapses and errors prevented creation of an alternate virtuous cycle, for example, exploitation of windfall oil revenues to recapitalize banks earlier in 2015-16, restore their health and lending, restrain off-budget borrowing expansion to open space and ease interest rates for private investments. Finally, the most serious consequence is the severity of the current demand collapse — this is characterized by significant falls in both investment and consumption. By comparison, the 2012-13 demand slowdown was limited to investment. It’s evident it was a matter of time before the build-up matured.
What now? The focus has to be on what can be done to reverse the deterioration and how soon. What policy options do the authorities have?
Unfortunately, there are no drivers. Fiscal space is exhausted, ruling out countercyclical expansion. Monetary policy has turned ineffective: the policy rate cuts pass-through to banks is limited, restricted to new borrowers in some segments. Credit demand has weakened — it is shocking that 110 basis point easing in one year to August 2019 elicited no response from consumer demand, which instead decelerates and raises questions about fundamental reorientation in spending-saving behaviours. The global downturn is deepening.
Without a strong impulse — policy-driven or a positive shock — and when balance sheets of all segments (government, private corporates, households) are strained with financial sector vulnerabilities — conditions that take time to improve — it is hard to foresee a quick or robust turnaround. There’s also concern that potential output has lowered, which could further foreclose future policy space. Monetary policy is the sole driver — how consumer demand evolves in response to immediate monetary transmission through external benchmarking of consumer, housing and MSME loans needs keen watching. For now, reports suggest even the government-driven credit push through ‘loan melas’ has failed to substantially move loan growth.
In these circumstances, growth is likely to remain around 6 per cent. It is important to ensure this doesn’t slip down further. Two, it would be prudent to scale down aspirations: most expect a rebound to 7 per cent next year, but a reversion to this trajectory is infeasible in the light of minimal policy options and demand prospects, such as they are, within and outside India.
