View: The devil of economic slowdown is not in the macro, but in the micro


By R Jagannathan

The answer to where the economy is headed is simple. When the broad stance of the Narendra Modi government has been to reset and reform the old ways of doing business, the short- to medium-term economic consequences cannot but be deflationary, for disruptions act as speed-breakers to economic activity.

You cannot grow at the old pace when you have to pay more taxes, when your balance-sheet is under water, when new bankruptcy laws may make you lose your company to loan defaults, and when the majority of the engines of growth are kaput. Of the four engines of growth, two — private consumption and exports —are out of action, and the other two — public investment and private consumption — are under the weather.

GDP numbers due on August 31 will clarify the situation, even as high frequency economic indicators are throwing out mildly contradictory signals: retail inflation in June edged up to 3.18%, but core inflation is down to 4.09%, and wholesale prices are at a 23-month low of 2.02%, which suggests that pricing power is weak. The Index of Industrial Production (IIP) for May was down to 3.1%, and with the core sector index at a 50-month low of 0.2% in June, the decline will probably be extended to the whole of IIP for the month.


But, in July, the composite IHS Markit Purchasing Managers’ Index — manufacturing plus services — was at an eight-month high of 53.9 against 50.8 in June.

Despite some concerns over revenue collections from GST, in this calendar year — January to July 2019 — collections have averaged Rs 1.03 lakh crore. This is below the hoped-for level of Rs 1.14 lakh crore. But the consistency in holding the Rs 1 lakh crore level in most months is encouraging. Either the economy is not doing that badly, or compliance is getting better. Both augur well.

However, the real answers will not be found in the headline numbers, but the subheads below. Entire sectors are in deep trouble — from autos to real estate, construction to telecom, and banking and finance, apart from agriculture, which is spooking even normally stable sectors like FMCG. As for exports, the less said the better.

It is likely that there will be some limited form of cyclical revival in fiscal 2020-21. But the problems of growth are structural and sectoral. Economists will suggest more reform of the factor markets to revive growth. That is eminently desirable. But we have to address problems sector by sector well.

Consider the auto industry. Over the last few years, it has been confronted with a dramatic shift in demand, driven by the rise of shared mobility, higher investments in public transport in all major cities, weak rural demand, and the oncoming shift to Bharat Stage VI. Then there is the policy shift coming in favour of electric vehicles, all of which have shifted the automobile demand curve leftwards. The bald fact is that the Indian automobile’s golden years came prematurely in a country where under-investment in public transport gave personal transport a steroid-like bounce.

In which other poor country would the total number of registered vehicles on the road — estimated at 250 million — be roughly equal to the number of households? The auto market is saturated, considering average purchasing power and high ownerships levels. The same structural pressures are pressing two other formerly booming sectors: banking and finance, and telecom. From nearly 10 players, cutthroat tariff wars have brought down the telecom industry to four, including the public sector zombie, the BSNL, MTNL combine.

In banking, while the bad loans crisis will be solved through higher capital infusion, the structural challenge confronting 70% of the industry that is in the public sector is digital. Technology is making much of the manpower, branches and ATM investments of banks underproductive. Which means future growth is about divesting overheads, not investing more in them.

To make things worse, non-banking financial companies (NBFCs) are floundering between the twin rocks of illiquidity and insolvency. It only needs one or two major collapses of the IL&FS kind to send another shock wave through the financial sector.

The same applies to real estate, where prices have been flat for years now, and unsold inventories in the top 30 cities of the country have hit a huge 12.7 lakh units, three-quarters of which are in the big eight metros. A 40-plus-month inventory means this sector will need prices to correct dramatically by 30-40% to revive quickly, or stagnate further for years to ensure time correction of prices. And reform in this sector means politicians have to let land prices crash by increasing supply (higher floor space index (FSI), changing zoning limits).

This may be the story in sectors outside IT services, logistics and retail, which are still in fine nick. But power is shifting from producers to retailers, and this has its own depressive impact on corporate profits.

The real question to ask is not where the economy is heading, but where various important sectors that will drive growth are heading. The devil is not in the macro, but in the micro.

The writer is editorial director, Swarajya

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