To Revive the Economy, We Must Swallow the Bitter Pill
The US Fed rate cut last month signalled that the world economies linked to the US dollar are under stress. Also, the  International Monetary Fund (IMF) cut global gross domestic product (GDP) expectation from 3.2% to 3.1% while India’s GDP slowed down to 5% in the second quarter this fiscal. The debate and discussion in the media has been on: are we heading for a recession or has the economy hit a slowdown as a natural phenomenon of the business cycle?
 
Growth rate of the Indian economy is linked more to the agriculture and services sectors than to others. But the precipitous fall in business confidence and consumer confidence indices, slowdown in savings and investment rates and in capital  formation signal the necessity of corrections on different fronts. 
 
A fall in the growth of real estate, automobiles and core sectors warranted policy corrections. It is, however, doubtful whether a stimulus is required. Moody’s expects the growth of the economy to be at 6% in the current fiscal. A 6% GDP growth, in an overall depressing scenario in the rest of the world, should be seen as encouraging but that does not leave any room for complacence. 
 
The IFO World Economic Survey, released every quarter, says in its recent statement: “In the emerging and developing Asia, the climate indicator fell, from +2.1 to –12.1 balance points. This figure mainly reflects the negative developments in China and India. The ASEAN-5 countries (comprising Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) saw a renewed downturn in their economic climate, from 34.6 to 21.3 balance points. The present economic situation continued to deteriorate but remained at a satisfactory level. The best economic climate is reported for Malaysia and the Philippines.” Malaysian Ringgit, it says, is undervalued vis-à-vis US$.
 
INFLATION RATE 
 
Retail inflation in India fell to 3.15% year-on-year as of July 2019, less than the RBI (Reserve Bank of India) inflation target of 4%. A growing economy should be having a healthy inflation index. High growth rates in the past were achieved against high inflation rates. 
 
An alarming rise in inflation to 12.17% in 2013 provoked the RBI to take stiff measures to bring it down to the inflation expectation target. Deflationary trend will send negative signals for growth. A comparison between India and China in terms of Inflation rates indicates peaks and troughs but does not cause the economy to shrink to lows, bringing it close to recession. 
 
On the retail price front, inflation accelerated to a nine-month high, though remained moderate and below its long-run average. If we can maintain at the RBI an expectation at 4%, that is a rise of 0.75 in the inflation rate, the economy will bounce back to a growth level of average 7%. 
 
 
GDP Per capita 
 
 
Comparing with US dollar, per capita GDP in India was 2104.20 in 2018, which is equivalent to 17% of the world’s average and it was at a record low of $330.20 in 1960. 
 
Poverty index also fell to a low of less than 20%, going by the NITI Aayog data. Bourgeoning middle class and conspicuous consumption would not disappoint the retail markets, particularly the fast moving consumer goods (FMCG) sector. This would mean that the slowdown would be a temporary phenomenon.
 
Consumer Confidence Index
 
Consumer confidence in India fallen to 95.70 index points in the third quarter of 2019 from 97.30 in the second quarter of 2019. It is way below the average of 103.10 for the period from 2010 until 2019. It has been falling since demonetisation but started rising till the second quarter of 2018. Thereafter, the fall has been precipitous. Reversing this requires more than pep talk. 
 
The goods and services tax (GST) has a sagging effect not merely on micro and small enterprises but also on consumers. While it has brought about the much needed business discipline and tax compliance, input credit delivery suffered gradually eroding the confidence in the system. This needs reversal sooner rather than later. 
 
Bank mergers contributed to the erosion in consumer confidence. Mergers led to distancing the reach of banking to the people, notwithstanding the new initiatives like the small finance banks, postal bank, small payments bank, Rupay card and Micro Units Development and Refinance Agency Ltd. (MUDRA). 
 
The speed of service through technology is different from the reach. Caring for customers has vastly eroded in the banks. Apps may be attractive but difficult to access for the semi-literate rural clients. If growth of the services sector is declining, financial services has a major contribution to this failure. This needs quick reversal.
 
BUSINESS CONFIDENCE INDEX
 
The business expectations index (BEI) fell to 112.8 in the second quarter of 2019-20 fiscal year from 113.5 in the previous three-month period. The index in India averaged 117.74 from 2000 until 2019, reaching an all-time high of 127.50 Index in the second quarter of 2007 and a record low of 96.40 Index in the second quarter of 2009.
 
Ups and downs are part of business cycles. Several states indulge in make believe efforts when it comes to projecting ease of doing business. Still, several departments and public sector companies indulge in the procedural rigmarole for paying the bills and releasing the promised incentives. 
 
It is necessary that all states should revisit their industrial incentives about what they can easily deliver and what they cannot, and whether the incentives are delivering the intended benefits at the right time. Giving rise to undeliverable expectations brings down the business confidence index. This needs correction.
 
MANUFACTURING NEEDS A BIG PUSH
 
The IHS Markit India manufacturing PMI (purchasing managers’ index) dropped to 51.4 in August 2019 from 52.5 in the previous month and below the market expectations of 52.2. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since May 2018.
 
Output rose the least in a year and new order growth slowed to a 15-month low, with overseas sales increasing at the softest rate since April 2018. Backlog of works and project delays continued. Employment levels continue to cause concern with not so good results seen even against the huge investments made in skill development. 
 
 
 
Technology and markets are growing at a rapid pace, throwing up new opportunities. More than 75% of global growth in output and consumption is in the emerging markets. Hi-tech advancements, like the industrial Internet of Things (IoT), machine learning (ML), artificial intelligence  (AI), though they have become buzz words in the industry, they are yet to catch up in all the segments of manufacturing. 
 
Some of the announcements like relaxations in foreign direct investment (FDI) policy touching retail and media, government junking old vehicles and replacing them with new ones will trigger a demand in auto sector only marginally. Cost-cutting across the supply chain remains a major priority. 
 
Addressing the workforce skill gap remains a challenging priority. Manufacturers can address the skills shortage by forming partnerships with schools, associates and even competitors to train and recruit talent at an early stage.  But rhere exists a gap in the confidence of industry to partner with educational institutions, irrespective of the emphasis that prime minister Modi and several state governments, like Telangana, have laid on it.
 
Though labour code has been introduced with the consolidation and rationalisation of 12 labour laws, the increased burden of social security and minimum wages requires re-engineering of business processes and restructuring of organisations and this may require some more time. 
 
In order that the industry develops its own push-pull measures, tax-breaks can be planned by the government for research and development. Corporate social responsibility (CSR) targets can also be dovetailed for a soft touch to the markets. When the morale is sagging, demand generation is hard to come by. Every measure from the government addresses just one or the other key component of manufacturing investment. It needs to be a facilitator and catalyst rather than pumping money into the economy. 
 
The areas where it should pump money are public investments in infrastructure and fast delivery of contract payments. Quick credit of input tax on payment of GST will also help. But unless state governments also come on board, avoid wasteful expenditure, monitor all their investments for quick results on an on-going basis and review the situation periodically through accredited third-party agencies, it will be difficult to reverse the slow growth. 
 
(The author is an economist and risk management specialist. He can be accessed at www.yerramraju1.com)
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    COMMENTS

    K V RAO

    2 months ago

    Economics topics are really a tamasha. Till 2013, mostly during UPA-1&2, we were worried about high inflation and RBI was shooting over the roof about this phenomenon. Since 2014 to date, RBI wants inflation target of 4%to be achieved. Is it not a tamasha? Layman who goes through inflation news would be shocked when economists call for higher inflation. Economics is not only a dismal science but also a confusing one. Of course, experts can always shut our mouth through difficult-to-understand postulates. There has always been debatable stuff and no wonder, when 6 economists gather, seven opinions may emerge.

    Hemant

    2 months ago

    "A growing economy should be having a healthy inflation index." Didn't understand this logic as USA supposed to be strong economy with low inflation.

    Ramesh Poapt

    2 months ago

    Govt is aware of this and subject to limitations, further
    steps are in the pipeline. it may take 2-3 quarters to
    lift the spirit.

    Exceptional Competitiveness Must Become the Bedrock of India’s Growth Model
    There is a lot of discussion in economic slowdown. Many industrial bodies including automobile manufacturers are pleading with the government for concessions and benefits citing lack of growth. Some people think that it is only a cyclical phenomenon. Others think it is structural. We discussed one reason - how rapidly lowering inflation stalls growth. But that is not the only reason. Another reason growth is sluggish is because older growth models are broken. India needs a new growth model. Various growth models have been tried over time and we have followed any. What are these and what we do we need to be successful?
     
    Colonial Model: This model involved control over the supplier of raw material and the buyer. The coloniser was the intermediate processor and controlled wealth creation. To gain control over the value chain the colonial power used military force.
     
    American Model: This model used innovation, capacity and competition to build wealth. It involved developing new products (light bulb), new methods of production (cars), scale (retail) and intense competition to create wealth. In essence, markets here are not controlled. The seed capital for the American industry came from being productive suppliers to colonial powers.
     
    Post War European Model: This model is quite similar to the American one except that it uses borrowed external capital. It also relies upon expansion of trade across the world, but importantly, between American and Europe.
     
    Japanese Model: This model used policy liberalisation, external capital and ideas but built upon it, first with lower costs and then with superior quality, to deliver competing products to expanding developed market. Japan had held its advantage by keep its domestic consumption in check. Two shocks pushed Japan towards innovation – end of US Dollar -Gold linkage in 1970s and the Plaza accord in 1985.  
     
    East Asian Model: This model followed the Japanese prototype but in later stages developed their advantage by using a devalued currency. The east-Asian crisis required the creation of dollar reserves which allowed them to keep their currencies low. They also benefitted from the US guarantee of being the policeman of the world.
     
    China Model: This is the East Asian model on steroids –in overabundance.  So much so that it may have broken the entire system. While East Asian growth was based on private enterprise, Chinese growth model was based on government trying to replicate that model on a very large scale and blistering speed. In many products China installed a capacity twice the global demand within just 20 years.
     
    Older Growth Models Are Broken
    During the 1970s and 1980s Japanese growth was going to cause large scale unemployment in the US because of its actions. But the American response almost pushed Japan to the brink. Treasury Secretary, John Connally, famously said, “Dollar is our currency but it is your problem”. 
     
    But China is way bigger than Japan. China broke the normal growth model by scale and speed. It did not allow the developed markets to adjust to the shifting of production centres. The Chinese investment-subsidy model hollowed out the middle class from the entire developed world except, may be, Germany. This time too, there will be a response -- possibly a global one. The trade war and the resulting protectionism are going to get worse. 
     
    Thus, India has to grow at a time when global growth is sluggish, globalization has plateaued and is likely to reverse. Countries will create barriers to protect domestic markets. India will have to fight for the global consumer, on unfavourable terms, with entrenched players. India will face stiff competition winning in the markets outside India. 
     
    There is a shortage of consumer demand globally. So, all the top global companies will look to gain from addressing the Indian demand. Within Indian markets too, there will be intense competition. India will not have any advantage except what naturally accrues to it. 
     
    Competitiveness Alone Will Drive Growth
    The way to win in this environment is by competitiveness of an exceptional grade. Indian firms need to be super innovative, and create better products that the world wants to buy. Most of the Japanese iconic products – Walkman, Casio watches, Honda Accord, came in the face of American response to Japan’s rise. 
     
    The Chinese too want to follow that strategy. For example, Huawei phones are winning consumer appreciation for innovation in photography.
     
    Indian firms must be super productive by having the best product at the lowest prices. Even today, our firms compete with products from China and across the world which tend to be cheaper despite high import costs. Indian firms need to win in this battle. 
     
    Indian firms should be able to scale rapidly when their product or service becomes successful. Firms should be able to procure global equipment, upgrade skills of the manpower and reach the market quickly. 
     
    Indian firms also need to be opportunistic. For example, we can leverage the global supply chain created by Amazon and allow our entrepreneurs to sell globally. We must also seek out firm relocating out of China in the light of trade tensions.
     
    Building Competitive Firms Needs Support
    Just to help small firms sell through Amazon we need to help them set up Amazon sellers’ page, identify the product trends and create marketing, advertising and outreach strategies. Access to risk capital would help firms scale up rapidly. 
     
    Thus, building competitiveness requires a network of practitioners, consultants, investors – in short, an ecosystem. While such talent and capital do exist in India, it is not organised effectively. 
     
    We have experts to help a bankrupt firm resolve its bankruptcy, but we do not have experts who can help the firm grow. Government should help create this mechanism with help from industry bodies. Institute of Management Consultants of India (IMCI) and such other bodies should be pushed to help Indian firms in building exceptional competitiveness.
     
    In Sum
    The path for Indian enterprises is difficult but not impossible. The first step on this path is to understand and acknowledge that our growth cannot come using the old models. The days of being a cheap, high quality, large scale supplier to MNCs are over.  
     
    Just as we are adopting global and domestic training methods to win medals in the Olympic Games, we need to similarly adopt a mix of global and domestic strategies to be globally competitive. If we train hard, we can win in the coming uncertain global environment.
     
    Disclaimer: The author has advised IMCI in a legal capacity.
     
    (Rahul Prakash Deodhar is a private investor and advocate, Bombay High Court. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.)
     
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    sanjeev naik

    2 months ago

    We can win.. but when ? Is the key question

    What lower GDP means for you and me
    While a decline in GDP affects the poor worse as India is one of the most unequal societies, it hits your wallet each time a slowdown is recorded. It takes toll on average income of the people and signals a squeeze on job opportunities.
     
    Illustrating the impact of lower GDP growth, R. Nagraj, professor of economics at Indira Gandhi Institute of Development Research, said that given per capita monthly income of Rs 10,534 in 2018-19, an annual GDP growth of 5% means that the per capita income will go up by Rs 526 in FY20.
     
    "Instead, if per capita monthly income grows at 4%, then the income growth will be only Rs 421. This means a 1% reduction in the growth rate has reduced per capita monthly income growth by Rs 105. In other words, a decline in the annual GDP growth rate from 5% to 4% would mean getting Rs 105 less per month," he said.
     
     
    Taken on an annual basis, the total loss to a person would be 1,260 in a year.
     
    It may be noted that the GDP has been slowing down quarter after quarter reaching 5% in April-June period of FY20 from 8% during Q1 of 2018-19. Most economic research firms have lowered their GDP forecast for full financial year.
     
    Cutting down FY20 GDP growth to 6.7% (six-year low) from its earlier forecast of 7.3%, India Ratings and Research (Ind-Ra) on August 28 said the current fiscal would be the third consecutive year of subdued growth.
     
    Moody's Investors Service sees India growing at 6.4% in FY20 as domestic and external headwinds would persist over the year.
     
    Aditi Nayar, Principal Economist, ICRA, said the pace of expansion of GDP and GVA in Q1 FY2020 was resoundingly lower than forecast, driven by a collapse in manufacturing GVA growth, even as the performance of most of the other sectors was largely along expected lines.
     
    Explaining the impact of lower GDP on common man, senior economist Nagraj said that lower GDP means a proportionate decline in per capita income. Further, given high inequality in the economy, it is very likely that the poor will suffer more from the decline in the GDP growth rate than the rich.
     
    "Correspondingly, the number of people below poverty line could rise. A decline in the GDP growth rate could mean a decline in the employment rate," he said.
     
    The GDP at constant (2011-12) prices in Q1 of 2019-20 is estimated at Rs 35.85 lakh crore, as against Rs 34.14 lakh crore in Q1 of 2018-19, showing a growth rate of 5%.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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