With an ongoing debate across the whole country whether the economic slowdown is structural or cyclical, it is evident that the growth has been slowing down. Gross Domestic Product (GDP ), a measure of all the goods and services produced within a country, has been slowing down since the beginning of 2019 which serves as a significant concern for the entire nation.
Considering the plethora of speculations regarding India’s financial crisis, numerous causes have led to the slowing of the economy. Looking at the statistics, it seems that there is an unannounced financial crisis in the country in its initial stages.
Reasons for Slowdown
Most Public Sector Banks(PSBs) are saddled with the high NPAs which has led them to slow down their lending and depend more on deposits. With the increasing bad debts and the collapsing demand, there might come a situation wherein no lending takes place and thus reducing fresh investment.
A strong banking sector is one of the most significant prerequisites of a strong economy because it channels the savings into the investment. In effect, a fragile banking sector will ultimately give way to a fragile economy. Among the several sectors which are showing a slowdown, food processing accounted for 5.3% of total NPAs.Being one of the most employment-intensive industries and pushing the growth of agriculture, any loss to the food processing industry will percolate to the employment as well as the agriculture sector.
2.Decrease in Private Consumption
Private consumption seems to have taken a beating. The SME’s investment has also taken a hit due to the cash crunch. Demonetisation is one of the primary factors for the slump in the Indian economy. Leading to a situation wherein cash dried up to a significant extent, I this has contributed to a freeze on investment by corporates and industrial houses. Paying down the debt or postponing debt repayments to ensure that their present cash flow remains sufficient has been a problem faced by Big Corporates.
Although the rollout of Goods and Services Tax (GST) in the Indian economy has ensured transparency, it has also led to a slowdown on a nationwide basis. Forcing small businesses to withhold their inventory until they migrate to the GST network and becoming compliant with the numerous rules and regulations, the tax reform has contributed to the slump.
Taking a look at various sectors, and analyzing how they are faring midst this slowdown with a specific focus on the impact on sales and profitability.
1. Automobile Sector
Analysing the automobile sector, car sales have fallen by more than 20 % in comparison to 2018. This slowdown in sales has a negative impact on several related industries like the manufacturers of steel, tyre, steering etc. and has also reduced the number of auto dealerships. The pace of vehicle loans growth has also slowed down to 5.1%, showing a decrease in its demand. Moreover, tractor and two-wheeler sales have also shown a drastic decrease in their sales, falling by more than 14%.
As per a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of 7% from March 2018. This means that builders are building new houses at a faster pace than people are buying them. The real estate sector has forward and backward linkages with 250 ancillary industries. So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings etc do well too. This is something which isn’t happening currently. The fact that real estate prices haven’t gone up much in years makes people feel less wealthy and as a result, spend less.
Over the past year, the volume of sales in the FMCG sector has slowed down to a great extent. For example, the volume growth of Britannia was down to 6% against 13% last year while Dabur posted volume growth of 6% against 21% last year in April-June. This situation is indeed worrying as people tend to have slowed down on their purchases.
India’s bond market remains small compared to other major economies, While the amount of outstanding rupee corporate notes, excluding banks, has been expanding for years, the pace of growth has generally been slowing since 2017 and marked its lowest rate in over a decade in May at 9.7%, according to a Bloomberg Economics index. India’s growth eased to a five-year low in the quarter ended March, and the central bank has cut interest rates three times this year.
In terms of investment in various sectors, the value of new projects announced during April to June 2019 fell by more than 75% year on year. This is the highest fall since September 2004. Moreover, the value of new investment projects announced during April to June 2019 has been the lowest since September 2004. This indicates that businesses do not have faith in the economic future of India, irrespective of what they say in the public domain.
As these economic indicators suggest an upcoming crisis and a possibly worse situation from hereon, it calls for stringent measures by the government for economic upheaval. Instead of acknowledging the problem, it’s time to solve this problem with effective implementation because if not now, then when?
Rahul Kabra is a Business Analyst at Vistas News. He’s a student at SRCC, DU.