For the last quarter of 2018-19, India’s GDP grew at 5.8%, well below the 7% average that it has clocked over the last few years. Estimates based on the proxies that forecasters use, like car sales or corporate profits, suggest that the first couple of quarters of the current fiscal year are unlikely to show a dramatic recovery. A more alarming prognosis is that this slowdown is structural.
This could mean growth rates of around 6% is the new normal. Persistent sluggishness in activity over a few quarters does not de facto make a slowdown ‘structural’. One has to carefully identify a shift in some aspect of the economic environment that is likely to endure in the long term. A marked change in consumer behaviour — say, a rising propensity to save more and consume less — is an example.
Besides, it is somewhat pointless to try and fit an economic slowdown into neat boxes labelled ‘cyclical’ or ‘structural’. Both are likely to coexist at any point in time.
Thus, any verdict on a slowdown (or recovery) has to decide on whether it is predominantly structural (PS) or predominantly cyclical (PC). India has had a myriad of structural impediments over decades: poor infrastructure, distortions in the markets for land and labour, an inadequately skilled workforce, etc.
Until recently, most economists believed that all these put together limited potential growth (or, the maximum growth rate without producing imbalances such as runaway inflation or an unmanageable trade gap) to around 7-7.5%.
So, the onus is on the PS camp to identify a new bunch of structural factors that has pushed this potential into a new ballpark closer to 6%. They have other problems to contend with. For one, it is possible to identify a couple of fairly intense short-term or cyclical factors that either preceded or coincided with the current slowdown. First, there was a massive compression in government expenditure in January-March, largely to meet fiscal targets, since tax collections fell way short of Budget estimates. Actual expenditure for this quarter was cut by as much as 20% from budgeted levels.
As spending resumes in the wake of the new Budget, it led to some recovery. Second, the period before elections is typically one of uncertainty when businesses and households tend to hold back on big-ticket expenditures. Also, most talking heads kept flagging the significant risk of a fractured mandate, a khichdi sarkar with khichdi economic policy, well into the poll period.
Thus, pre-results jitters were particularly acute this time. The non-banking financial company (NBFC) problem that started with the implosion of Infrastructure Leasing & Financial Services (IL&FS) last July, setting off a minor contagion, lingers and is taking a toll on demand. Its impact was magnified by the growing share of NBFC lending in total credit from roughly 14% in 2013 to over 17% in 2018. Importantly, they lent to both consumers and companies.
So, their slowdown would impact on both retail spending and corporate activity. Besides, while there was some overlap with banks in the areas in which they were active (vehicle finance, for instance), they focused on the subprime segment (to use the phrase somewhat loosely) of borrowers that banks were not entirely comfortable with. So, substitution of NBFC finance by banks has been imperfect.
Take Time for a Clean Up
Crises, by their very nature, cause short-term disruptions. Their impact is invariably tamped down through policy measures. However, while the conflagration can be doused quickly, the clean-up that follows often takes a long time, because of the tangled web of interconnectedness of both debtors and creditors. This might prolong the slowdown, but does not make it structural. The rise in global protectionism on the back of the US-China trade war is the closest to a major structural change.
Prima facie, it means a permanent loss in demand for Indian exporters. That said, this is being accompanied by a realignment of production bases, with China and those high up on its supply chain as the clear losers, while others like Vietnam and India stand to gain. In fact, some gains are already visible.
In the January-April period, China’s exports to the US dwindled by 15% YoY, while Vietnam’s exports grew by 40% and India’s by 10%. So, whether rising tariff and other walls constitute a structural gain or loss depends on how well we can take advantage of this opportunity. Finally, three things need to be borne in mind in trying to fight sluggish growth.
One, years of high accumulated government and public sector debt should effectively rule out fiscal stimulus. Gains for growth from priming the fiscal pump are likely to be ephemeral, but the costs in the form of inflation and rising interest rates could last much longer. Two, a country looking to trade more with others should not simultaneously raise its own trade barrier.
Further hikes in import duties are eminently avoidable. And, three, there is that fuzzy thing called ‘confidence’ that appears to be missing among domestic firms that have seen rising capacity utilisation. This can be addressed through a constructive dialogue between government and industry that leads to a well-defined industrial policy.
The writer is chief economist, HDFC Bank