All is not well on the economic front

Jayshree Sengupta
Senior fellow, Observer Research Foundation

PRIME Minister Narendra Modi declared recently in South Korea that the fundamentals of India’s economy were sound. That’s true, but ignoring certain troubling signs for the economy may not be the right path for the government at this juncture. Globally, there are a number of stressed economies today; India, too, seems to be caught in a bind over some important issues. India may be seen as chugging along at a relatively high rate of growth of around 7 per cent, but looking at some core economic fundamentals, there is a need for immediate attention. With the elections approaching, the NDA government will, of course, claim credit for the sustained high economic growth over the past five years, but it needs to take action to avert the impending problems.

Globally, the US economy is slowing down. Most importantly, China is showing signs of an intractable slowdown which will affect all, including India, because of its size and importance in the global economy. Germany, Italy and Britain are also showing signs of slower GDP growth.

In India, agriculture remains stressed as food inflation stays low; as a result, the earnings of farmers are smaller than before. The promised doubling of farm income is a distant dream. Farmers generate demand for industrial goods. Their requirement for two-wheelers, mobile phones, agricultural machinery, consumer goods and gold is important for resuscitating industrial growth.

Low demand has remained a problem for the economy and the government has rightly reduced interest rates by 0.25 per cent to 6.25 per cent on the grounds that the rate of inflation has remained low over an extended period. It will act as a stimulus that the economy needs, especially in boosting private investment. A low level of private investment is responsible for the slowdown in industrial growth.

The government has offered an income of Rs 6,000 per year to farmers in the interim Budget. However small it may be, people in the villages would welcome it because farmers suffer from the ‘money illusion’. Cash in hand makes them feel richer and buy more goods.

Apart from agriculture, India Inc is not doing well. Business Standard reported that the declared corporate results had been unusually poor. The third quarter (Q3) profit results for the current financial year show a pattern of slowdown being experienced by other countries, marked by falling margins. In India, the moderation in economic activity manifested itself in lower air passenger traffic, low vehicle sales, smaller capital goods’ production and, in general, deceleration of industrial growth. IIP (Index of Industrial Production) growth and export growth have both been lower than before recently. Export growth is likely to face hurdles because according to a recent report by the World Trade Organisation (WTO), international trade has been shrinking mainly due to the trade disputes between the US and China. India is also likely to face problems in its pharmaceutical exports to the US as the latter is preparing to impose various barriers on its trade with India. 

In the corporate sector, the combined net profit of 2,338 companies was down by 28 per cent year-on-year compared to Q3 in FY2018. The combined net profits of 2,005 companies (excluding gas and non-banking finance companies) were down by 39.7 per cent to Rs 47,500 crore, which is the worst performance in the past three years. Many famous names such as Tata Motors, Vodafone Idea, Punj Lloyd and Adani Power suffered losses because of slow growth of revenue compared to expenditure. 

Fortunately, the service sector has remained buoyant and the IT industry clocked reasonable net profits of 6.7 per cent. Globally, India is competing with IT companies from other countries in markets abroad. The depreciation of the rupee has cut into their margins.

The banking and finance sector remained under duress, though there has been recovery; profits of banks in the last quarter were Rs 900 crore. But many public sector banks posted net losses. Since China’s slowdown, there has been a downswing in commodity prices as its demand for metals and other raw material has fallen. Hence, our metal and mining industries may not do well in future. Rise in crude oil prices is also an imminent threat to India’s current account deficit, which may widen if imports of oil become costlier.

On the fiscal front, the offer by the Reserve Bank of India (RBI) to the government of its surplus funds of Rs 28,000 crore has been a welcome boost to bringing about macroeconomic stability in the economy as the money will help in bridging the gap in the fiscal deficit target of 3.4 per cent of the GDP, which the government could not have met otherwise, especially with bleak prospects of a big GST revenue collection. Meeting the fiscal deficit target will help India retain a good rating by the international credit rating agencies. It will help India raise capital in the international capital markets to bridge the infrastructural gap vis-a-vis China. Poor infrastructure makes us a third-world country. 

Foreign investors will wait and watch for the election outcome before making fresh commitments. The FDI (foreign direct investment) flows have already decreased as some FDI has been put on hold. A stable government after the Lok Sabha elections is important for the economy. An assurance of reformist policies by the new government will help investors make up their minds.

Rising government expenditure has played a key role in recent times to keep the economy rolling. The elections will witness a substantial rise in government expenditure, which may further boost demand.