New Delhi: There can be no dispute over the fact that India is facing a double-edged economic sword: falling consumption demand and declining private investment. As the GDP growth slows to multi-year lows, unemployment rises to historic highs and industrial production slows while inflation rears its ugly head again, the government’s incremental and sector-specific steps to boost growth may not have been anywhere near enough to address the concerns over demand and investment. But this state of affairs has remained largely unacknowledged by the mandarins of the finance ministry. They have instead been busy proving that government’s measures have led to improvement in consumption demand. In fact, these officials have, several times already, prophesied that the widespread economic slowdown has bottomed out. In their hurry to point to the proverbial green shoots, these officials could be doing more harm than good, by ignoring troubles plaguing the economy.
In mid-September, when finance minister Nirmala Sitharaman announced the third set of measures to tackle the slowdown, she proclaimed the economy was already witnessing a revival.
She cited growth in industrial production (IIP figures) April and July and also statistics for the revival of fixed investment in the June quarter to bolster her claim that green shoots were already visible in the economy. Economists and analysts warned then that any such data was of too short a period to account for sustained revival and it was probably too soon to even speak of a revival.
We know now that as per the government's own data, industrial production has been shrinking since, with growth in factory output in September at a six-year low at -4.3 per cen. Other macro data also point to a deepening slowdown – no green shoots are visible yet – and several internal as well as external agencies have now indicated that GDP growth this year may not even touch the 5% mark. In Q1 of 2018-19, India’s economy grew at about 8% but dipped to 5% in Q1 of this fiscal: so the sharp and rapid contraction in growth is obvious.
Against this background, Sitharaman’s renewed assertions of things improving due to government actions seem to have once again come too soon.
In an interview to the Times of India, the FM said, “If consumer sentiment is not on its way to being restored, what do you think of the amount that has gone out as loans during the two outreach programmes by banks?...Second, look at the way used cars are being bought. Third, car company executives, the big ones, have met me and I asked about their inventory. At least two of them said there is no issue. That could not have been without consumer sentiment. I didn’t meet the third company, but was told that the entire stock was sold and there was a two-three month wait. There is a clear indication that consumer sentiment on its way to being revived. ”
Has demand sentiment improved? Take the case of vehicle inventories. Data put out by the Society of Indian Automobile Manufacturers (SIAM) show that in the first seven months of this fiscal year, passenger car manufacturers cut production by a fifth or by more than 3.5 lakh vehicles compared to the same seven months last fiscal. Almost 13.5 lakh less motorcycles were produced in factories across the country during this period. And if one were to look at the grand total of all vehicles produced in these seven months (cars, SUVs, small and heavy trucks, scooters and bikes), then India’s automobile manufacturers together cut back production by nearly 30 lakh vehicles. The production cutbacks were necessary due to a sharp decline in vehicle purchases. People have been reluctant to buy cars and bikes and there has also been a significant weakening in the demand for commercial vehicles as economic activity slowed.
Yes, the retail offtake of passenger vehicles did improve during Diwali, thanks to hefty and unprecedented discounts by dealers. SIAM data showed that while total vehicle dispatches from factories to dealerships were still negative at -12.76% in October, those of passenger vehicles (cars, SUVs and vans) were marginally up with 0.28% growth. This was the first such positive number seen in nearly a year. But the key to revival of automobile sales is sustained vehicle buying after Diwali, without the hefty discounts. Two-wheeler sales and those of trucks are still very much in the negative territory. And while analysts have acknowledged that October retail sales were better, they say the key parameter to watch out for is whether demand will be sustained after the festive season and after withdrawal of high discounts. Some have said recovery in vehicle sales may not happen for another year. So was the finance minister just using selective data to claim that demand revival has begun by merely talking of inventory correction just after Diwali?
In a written reply in the Lok Sabha, Sitharaman again said that the government is taking several measures to address “moderate levels of fixed investment rate in the economy, plateauing of private consumption rate and a modest export performance, with a view to increasing the GDP growth of the country”.
Recently, a draft report by the NSO showed consumer spending fell for the first time in over four decades in 2017-18. The government has now junked that report, citing inconsistent data. There is no fresh government data to show whether household spending declined after 2017-18 too.
Meanwhile, the FM also said that the massive cut in headline corporate tax (from 30% to 22%) she had announced in September came “at the right time” but the industry will take time to announce fresh investments. A cut in corporate tax, though a welcome move, was never going to lead to a spur in consumption demand and therefore lead to quick economic revival. At best, it could spur fresh investments by companies who get benefits from lower tax rates but these investments too would happen over the medium term, not immediately.
While replying to another question, Sitharaman dismissed concerns over declining GST revenues. She said leakages were being periodically plugged and GST revenue should be better than last month. An analysis by SBI Mutual Fund has shown that the gross tax revenue has grown by a mere 1.5% in the first half of the fiscal year (April-September) against a required growth rate of over 18%. Not just direct tax collections, even GST collections have been below par, at -3% against needed increase of over 13% for budget targets to be met.