Racing Downhill
Hey Vivek,
And here we go. Our first post! Thought I’ll start by writing a bit on the state of the Indian economy.
Econ 101 alert! GDP, as you know, is the sum of all the final goods and services produced in a country. Consumption, investment, government spending and net exports add up to give us the GDP of a country. Let’s look at broad indicators to understand how each of these is fairing out right now.
Consumption
Dreams of most Indians are made of owning a vehicle and a home. Yet, both sectors are reeling under immense stress. Auto sales have slumped in Q1–2020 and almost all auto stocks are down. Real estate has been down for a few years now. Not a scientific approach to see how consumption is contributing to our GDP, but I am sure you get the direction in which it is headed. Also, RBI has reduced interest rates in quick succession. The current repo rate is at a nine year low. This measure was taken to boost demand. A simple inference from this is that consumption isn’t doing good.
Investment
For those who argue housing should fall in investment and not consumption, I get you. I feel you. Economists do not agree on one clear classification. But for calculating the GDP investment and consumption add up, so the classification really does not matter.
The health of banks can act as a good indicator of the investment part of the GDP. After all, it is the banks that provide firms with the capital to invest. Crippling NPAs, high provisioning and a slower than expected resolutions of distressed loans have impacted the lending ability of banks. Q1- 2020 saw improvements in results for most banks but at the same time, the news of DHFL failing to meet its debt obligations has raised fears of the stability of the NBFCs and the exposure of banks in NBFCs. The Index of Industrial Production, an indication of the manufacturing industry’s health has fallen to 2% , a four-month low. It was around 7% in the same month last year. This hints an excessive production capacity in the industry, a clear indication of slowing demand and hence reduced investment by firms. Another way to look at how the investment is doing could be to see how the jobs market is doing. More productive investment should lead to more jobs. A December 2018 leaked govt report which was subsequently made public in May 2019 indicates unemployment is at a 45-year high. Clearly, investment too isn’t doing well.
Government Spending
Well, the government in its budget for FY2020 said it wants to cap the fiscal deficit to 3.5% of GDP. The target was 3.3% for FY19 which they could not meet. This 3.5 % target is also based on very steep tax collections estimates. Okay! So the government seems to spend then. Well, that has been the feature for most of the years in India. More so in an election year. Government spending in a way drives the Indian economy. But it is also important to look at where the government invests. If it is investing in things that will bring more value or will it spend on expenses that do not create much value. In the recent budget, the capital expenditure, i.e., the expenditure that the government invents in to create fixed assets that will in turn help create more value has increased by only 6.9%.
Net Exports
Trade mayhem has struck the world as a new type of globalisation is trying to take shape. Rhetoric from leaders of many developed countries indicate that the current trade arrangements are unfair to them and unjustly benefit the developing world. Among these trade standoffs, the one between the USA and China has caused increased volatility in global trade. Add to this the fact that Indian exports are also not high-value finished goods. Thus, do not command much premium (Indian IT might be an exception). India’s net exports have suffered. The uncertainty of Brexit and the continued tariff wars will only hurt the global economy further as the world settles to a new normal in global commerce. A fallout of this can be seen by the fact that the price of gold has shot up by over 15% this year already. Typically this steep rise is seen only when the market loses faith in the paper currency, and instead invest in the age-old and time tested investment, i.e., gold.
Summing it up
So when all of them add up, our GDP does not seem to be in good shape. So much so that the government, just weeks after passing the budget, is reported to be working on a stimulus package.
There is an urgent need for the government to take steps to boost demand and to nurse the economy to health. Cutting taxes, industry-specific stimulus packages, and having a more equitable tax regime that doubts taxpayers less is the need of the hour. This could mean a bulging of the fiscal deficit of the economy. But with hardly any private investment picking up, I think a government intervention to put more money in the hands of the people and industry is the need of the hour. Of course with this, the danger of crowding out of funds and high inflation arise which have to be calibrated and factored. The latest quarterly reports of the industry and the jobs data should be a wake-up call to the government. An economic problem can soon snowball into social unrest. This must be avoided at all costs, for social unrest feeds off bad economy which in turn feeds off more social unrest. Eventually, both the economy and the societal harmony collapse.
But then again…
Just as economists can’t decide if buying a house counts as an investment or consumption, they do not have a clear solution to an economic slowdown as well. The solutions I argue for above stem from the Kenseyian school of thought. The classical school, neo-classical or new classical thought folks will have entirely different approaches on how to address the issue. Hell, I am not sure if they will even agree on what the issue is!
Cheers!
Bheem
Disclaimer: All the views expressed above belong solely to the author, and do not represent those of the organization he works in.
Duologue is an effort by Vivek and Bheem to have a dialogue about varying topics.
Originally published at https://duologue.substack.com.
