Economists love to give names for periods of prolonged economic slowdown. The former chief economic advisor, Arvind Subramanian, calls the current economic crisis the country is experiencing as India's 'great slowdown', something he equates to the economic crisis India witnessed in FY'91-92 when the gross domestic product (GDP) growth rate fell to 1.1 percent, currency tumbled and most macroeconomic indicators collapsed.
The major finding of Subramanian in his latest research is that India is not experiencing merely a consumption-led slowdown but a combination of cyclical and structural factors that have been evolving over a period of time. Factors like absence of land/labour reforms, he observes, have been prevalent for almost two decades. He would rather blame the fall in investments and exports as critical reasons for the current economic situation.
Why is suddenly everything collapsing now, Subramanian asked while delivering a speech at the Bangalore International Centre based on his research with Josh Felman, on 11 December.
" Arvind Subramanian (@arvindsubraman) December 12, 2019
Remember, post-his exit from the NDA-government as Chief Economic Advisor (CEA) in June 2018, Subramanian had raised some serious questions on the Indian economy. Of these, the most important one was his research paper on how flawed India's new GDP series is where he cited the sharp disconnect of headline numbers with a host of macroeconomic indicators.
The former CEA's revelation that the new GDP data doesn't pass the smell test triggered an intense debate, with economists and government officials debating the claim.
Subramanian's latest observations
Some of the major observations of Subramanian's Bangalore speech were:
One, India's 'great slowdown' doesn't have quick solutions. There isn't an easy cure for the current meltdown given that bank NPAs are still high and rising, NBFC bank balance sheets weak, and power, real estate sectors facing major problems.
Two, cutting personal income tax rate at this juncture is a bad idea, so is increasing the GST rate when the economy is in a mess. There is an oddity in the government cutting corporate tax on one side and hiking GST rate on the other in a scenario when the economy is facing a major slowdown.
Three, the RBI should initiate the next round of NPA clean-up or Asset Quality Review (AQR), now. It shouldn't be limited to NBFCs but also to banks because problematic loans have returned to the banking system following the NBFC crisis.
Four, the Insolvency and Bankruptcy Code (IBC) has helped but hasn't shown the desired results yet. Only about Rs 82,000 crore has been recovered so far. It requires more fine-tuning to make it a success beyond just steel companies.
Five, there is a big trust deficit in India's official data, mainly GDP, employment and consumption figures. The government should act to regain this lost confidence as risks wrong policy formulations based on distorted data.
Economy in distress
A day after Subramanian made his speech, the latest data confirmed that the economy was in a tailspin. The Index of Industrial Production (IIP) for October came as a shocker. The IIP contracted by 3.8 percent compared with a contraction of 4.3 percent in September and 1.4 percent contraction in August. Retail inflation, on the other hand, rose to 5.54 percent in November compared with 4.62 percent in October. These numbers show that the economy isn't attempting any recovery so far, despite the several measures announced by the Narendra Modi government to prop up growth, including a steep cut in corporate tax, major disinvestment initiatives and a series of monetary policy rate cuts from the Reserve Bank of India (RBI).
Lets take a closer look to know the extent of the fall. The manufacturing segment contracted by 2.1 percent, electricity growth contracted by a massive 12.2 percent - the lowest in seven-and-half years, growth in capital goods segment that reflects the investment activity on the ground plunged by negative 21.9 percent (lowest growth in over six years) and infra/construction sector growth at negative 9.2 percent, again, the lowest in six and half years.
Consumer durables contracted by 18 percent while non-durables shrank by 1.1 percent, marking the lowest growth in six-and-half years at least. Even more surprising is the fact that grwoth in consumer durables is tumbling despite October-November being the peak festive season in most parts of the country. In the second quarter, GDP fell to 4.5 percent following a 5 percent growth in the first quarter. With inflation inching up and growth slowing, some economists have flagged a state of 'stagflation' in the economy.
The persisting slowdown has created a vicious cycle of low demand and consumption, a decline in investments/exports and bank credit and a high amount of impaired assets. The problem exaggerated in the Indian economy with the collapse of IL&FS in October last year. The liquidity shock didn't end with one NBFC, instead, the crisis spread to other known names like DHFL that was later recommended for bankruptcy. Banks significantly reduced lending to non-banking sector. Even now, the real extent of bad assets in the NBFC space is not fully known.
Does Subramanian get it right?
The former CEA's speech at Bangalore does not really highlight any new issues. It also does not offer any major prescriptions to solve the crisis scenario beyond what is already discussed in economic circles. But probably the biggest takeaway from his speech is that the government should not go in for knee-jerk steps to counter the slowdown and set unrealistic targets, an obvious reference to the $5 trillion claim. Instead, the government should accept the new normal of slow growth and take a more measured approach without putting its finances in bigger trouble. Over to the government now.