ANKARA, Turkey / NEW DELHI, India
A fall in private consumption, global developments and domestic political issues have contributed to the deepening of a slowdown in India, Asia’s third-largest economy, said an economic expert.
Speaking to Anadolu Agency, M K Venu, a senior economic journalist in India, said that an inclusive politics and a good economy complement each other, implying that certain decisions of Prime Minister Narendra Modi-led government, creating strain in domestic politics have affected the economy and its growth as well.
The India’s gross domestic product (GDP) growth has gone down from a peak of 8.2% in 2016-17 to 6.8% in 2018-19, with the fourth quarter of 2018-19 dipping to 5.8%. It has further dipped to 5% in the first quarter of 2019-20. Besides, the country is recording 45-year high unemployment rate.
Quoting government’s own unemployment data, Venu said that the unemployment rate was as high as 17-20% among the youth aged 15-35.
“Most worrying factor is that new jobs are not getting created," he said.
Venu, a founding editor of popular news portal thewire.in and also a commentator on Indian economy over past three decades, said that the GDP growth figures of first quarter of 2019-20 financial year, from April to June have surprised everybody.
“In fact, the governor of India’s central bank went on record that he was surprised by this fall and decline in the GDP growth. So, when the central bank governor himself says with all the research under his command, that means something is wrong with the economy,” said Venu.
The economist said that over past three decades, he has never seen such a steep decline. It was 8% last year, during the first quarter.
Car sales down
India’s leading carmaker Maruti Suzuki earlier this week reported a 24.4% decline in its sales in September.
Similarly, another auto sector giant Honda Cars India Ltd. also posted a 37.24% decline in domestic sales.
“The auto manufacturing and sales, one of the significant employment absorbing sectors, is reporting drop in sales continuously over past seven to eight months. Some 200-300 sale units have shut down,” said Venu.
Recently Maruti Suzuki announced halting production in its main unit, in the outskirts of capital New Delhi for two days amid reports of drop in sales.
The slowdown compelled the government to respond with a spate of announcements last month.
Finance Minister Nirmala Setharaman announced merger of several state-run banks in order to form “fewer and stronger lenders.” The country of 1.2 billion will now have 12 state-run banks instead of 27.
Venu said that the banking sector in India was already in crisis.
He expects a fresh crisis in the non-banking financial sector due to collapse of real estate market over past five years.
According to a leading real estate services group, Anarock Property Consultants Pvt. Ltd, the sale of residential apartments has declined by 18% across major cities during the period of July-September.
Demonetization, new tax policy hit hard
The leading economist said that Indian economy would not have been so bad if the government had not resorted to demonetization in Nov. 2016 when it withdrew 85% cash from the market in a bid to fight corruption and stashed unaccounted wealth.
“The act precipitated the crisis especially in the real estate, informal and agricultural sector,” he said.
He described low rural wage growth rates the most worrisome aspect. Past five years, they have remained stagnant at less than 1%.
“The demand comes from rural India, because 60% to 65% people live there. When rural wage growth is stagnated, it means a steep fall in consumption,” he said.
On government’s single tax policy, on the supply of goods and services, right from the manufacturer to the consumer, known as Goods and Services Tax (GST), Venu said it was a good reform, but its bad implementation further compounded problems.
“It has hit small and medium sector which contributed to 40% to 45% of India’s GDP. Even exports have collapsed,” he said.
India witnessed a sharp drop in the GST revenues to a 19-month low in the month of September.
Venu said the exports had also hardly grown over past five years, due to global competitiveness and other factors.
He remarked that the U.S.-China trade war also came at a "bad time" and has further worsened Indian economy as it slowed down global investment and trade flows.
“There is domestic crisis and global crunch. Both have come together at bad time [for India],” Venu said.
Cutting corporate tax to boost investment
In another step to boost growth, the government cut corporate tax from 30% to 22%, in order to attract foreign direct investments. The tax for new investment was dropped to 15%.
Venue called this step a "panic response" which is unable to bring desirous result.
Pointing out that when there is a global slowdown in the U.S., Europe, China, Germany and the U.K., Venu said foreign investors would hardly have money to invest in Indian market.
He said the biggest problem for the Indian economy has been a virtual shutdown in the banking system because of huge bad loans, accumulating in last five years.
“The banks are not lending to industry because of this situation,” he added.
Late July, India's central bank transferred nearly $24 billion to the central government, days after the credit rating agency Moody’s Investors Service revised India’s GDP growth forecast.
"This contingency money with central bank is used during emergency situations. But it is a one-time thing and not even sustainable solution. Sustainable economy requires robust generation of incomes and also where government earns tax revenue year-on-year basis," he said.
But, most of all, Venu suggested it is inclusive politics that keep economy in good mood and helps its progression. “The politics of majoritarian consolidation does not compliment the economic growth, as it edges out many sections of society and inculcates an element of fear. Non-exclusiveness does not help economy,” he said.
He said even India’s former Chief Economic Advisor Arvind Subramanian has mentioned this element of non-inclusive politics hitting the Indian economy.
Subramanian was chief advisor of Prime Minister Narendra Modi when he came to office in 2014.
“India can't become an economic power by trampling on the basic rights of people,” said Venu.
