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Wages Of Demonetisation

Wages Of Demonetisation

Amidst the high-voltage drama over the arrest of P Chidambaram by the Central Bureau of Investigation (CBI), the mainstream media forgot the real issues that the Indian economy is faced with. At the time of writing this column, the entire media seem to be inside his house. Some are even seen waiting for his arrival at the CBI headquarters. At a news channel, a debate is in full swing: Is it political vendetta? At another channel, the debate is on how the CBI entered his house.

While Modi envisioned a 5-trillion dollar economy, when he spoke from the ramparts of the Red Fort on the 73rd Independence Day, the things seem to go haywire, if the signs of economic slowdown are anything to go by. The way he spoke, it seems, Modi is clueless about the economy. It is good to be optimistic but it is suicidal to ignore the initial signs of economic slowdown, which is not being adequately reported as it should be. In fact, the signals started appearing with the dawn of the New Year in January itself.

Now what are these signs of economic slowdown? How is it measured? One of the most common indicators is how it impacts the gross domestic product (GDP). For the quarter that ended in March 2019, the GDP growth rate reduced to 5.9 per cent, as compared to 7.7 per cent in the same period last year. Going by the recent quarterly reports of most of the companies, the growth rate is expected to go down further. What exactly is going wrong?

Imagine a man finding a wallet with Rs. 500 on a road. Driven by his emotions, the man decides to donate the money to a temple. However, as he walks further, he sees a book shop and buys a book. The book seller in turn buys liquor. Liquor shop owner was tired and went to cinema. He not only bought movie tickets but also purchased a burger and a cold drink with the money. The cycle continues. The Rs. 500 has added to the purchasing power of many people. 

Now when we say, there is an economic slowdown, it is akin to the first man keeping Rs. 500 in his pocket and refusing to spend the money. In other words, consumption is the key to economic activity. It forms around three-fifth of the Indian economy.

Over the last few months, there has been a cut in consumption. Be it the auto industry, real estate or FMCG, there has been a considerable reduction in their turnover. During the quarter that ended in June 2019, car sales fell by 23.3 per cent in comparison to the same period in 2018. And this has been the biggest contraction since 2004. Unfortunately, data beyond that period is not available for comparison. Two-wheeler sale has also gone down by 11.7 per cent. Even mopeds and tractors are not selling. There has been a reduction in the turnover by 19.9 per cent and 14.1 per cent respectively. In other words, the auto industry is facing the heat, which would certainly impact other manufacturers like tyre, steel, spare parts etc.

According to a research conducted by Liases Foras, India’s top 30 real estate companies had an unsold stock of 1.28 million units as on March 31, 2019, which is higher than 1.2 million last fiscal. Simply put, the real estate companies are making houses at a faster pace than they are being sold. If the real estate sector performs well, it helps in flourishing another 250 ancillary industries ranging from steel, cement, furnishings, paint etc. Low consumption has also affected the banking sector, with fewer people taking home loans or auto loans despite lower interest rates.

And so is the story of the FMCG (fast-moving consumer goods) sector. Quarterly sales for Hindustan Unilever showed only 5 per cent growth in June 2019 compared to 12 per cent last year. Similarly, Dabur India posted a volume growth of only 6 per cent compared to 21 per cent last year in April to June. The biggest blow comes when we look at Britannia, which went down to 6 per cent from 13 per cent last year. This shows that people are not even buying basic necessities, more clearly biscuits!

One of the biggest indicators of economic activity is the revenue that the railways generate from freight. If the freight volume is higher, it indicates a higher movement of products like coal, pig iron, cement, petroleum products etc. from one place to another, showing a good co-relation between demand and supply. The freight volume grew only by 2.7 per cent in April to June 2019, compared to 6.4 per cent in the same period last year.

Even the tax revenue of the Central government grew by only 1.4 per cent, compared to 22.1 per cent last year. That is a considerable reduction. This is despite the fact that both exports and imports stood at similar levels as last year.

The globally renowned consulting firm McKinsey has published a report showing the severity of crisis. The firm examined the balance sheet of around 23,000 companies across 11 Asia-Pacific countries and found that a majority of the firms are facing issues in debt-servicing (meeting their obligations towards bank loans etc.) A similar situation arose in 2007 when the world faced recession. In Asia, these pressures have increased since 2007 while the US and the UK are better off.

The analysis showed that the companies are using most of their earnings in repayment of debts. The Indian companies had the highest share of companies with long-term debts with interest coverage ratio of less than 1.5 per cent amongst Asia-Pacific countries. The McKinsey report has expressed concern on increased indebtedness, stresses in repaying borrowing and shadowy bank practices.

The former RBI governor, Raghuram Rajan, has described the economic slowdown as “very worrisome”. In fact, the slowdown has already affected 8 to 10 lakh people, who lost their jobs over the last one year. The auto industry alone is a source of income for around 40 million people. If the current situation persists, the industry may have to cut down production. TATA motors, Hero MotoCorp, Mahindra, Suzuki, Toyota and Ashok Leyland have already announced production cuts. This will certainly increase the unemployment rate.

The current situation is influenced by global trends as well. However, to a large extent, India has been facing the heat, mainly due to the after-effects of demonetisation and GST. The economy could not recover fully from demonetisation when GST was implemented haphazardly, without giving much thought, affecting the small businessman. 

It might have temporarily helped in increasing tax revenues and bringing people under the tax net but it has also affected consumption because of the high tax rates.

In other words, India Inc. has to devise a policy to kick-start its growth engine. The dream of having a five-trillion dollar economy will remain a distant one. The key to this is acceptance – acceptance not only of the fact that we are slowing down but also that our GDP figures do not present the real picture, as has been pointed out earlier in this journal. And there is no quick-fix solution to this. Hope India Inc. led by Mod-II treads a wiser path.

(The writer, a company secretary, can be reached at jassi.rai@gmail.com)

(Published on 26th August 2019, Volume XXXI, Issue 35)