There were concerns about India's economic strength after it lost the crown of the world's fastest-growing major economy last year but many hoped it would prove to be only a temporary dip. Those hopes were soon dashed after the government released figures for the latest quarter, showing the rate of slowdown in Asia's third-largest economy is worse than many had feared.
Measures the ruling Bharatiya Janata Party has taken in recent days, including a series of mergers of public sector banks and relaxing some of the country’s foreign direct investment rules, may not be enough to deliver the quick fix that India’s economy needs, analysts say.
“We think more significant measures would be needed given the enormity of the task,” says Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers. “India is now behind not only China but also the Philippines and Indonesia in terms of its real growth rate.”
India’s gross domestic product data for the April to June quarter, released on Friday, came as a shock, showing the economy grew by only 5 per cent, its slowest rate of expansion in more than six years. Analysts were expecting the GDP growth figure to come in at around 5.7 per cent for the quarter, and even that forecast was worrying in itself – being below the five-year-low of 5.8 per cent.
Economists say the slowdown is due to faltering consumer demand and private investment, reflected in growth of only 0.6 per cent in the manufacturing sector in the April to June quarter. The Indian rupee has weakened to around 72 against the dollar and the escalating trade tensions are adding to India's woes.
Businesses are now saying, they've begun to feel the pinch.
“The economy is staring at very dark days [ahead],” says Koshy Varghese, the managing director at Value Designbuild, a property developer based in Bangalore. “What creates more anxiety is the lack of transparency by the government in admitting that there are problems. By trying to sweep the issues under the rug and offering stimulus packages [as an eyewash], the signal to the business community and the people at large is one of confusion and an inability to acknowledge the truth.”
Mr Varghese says sales have dropped “drastically” in the real estate market, which is good indication of where the economy is heading as when the economy “starts to stutter, the real estate sector begins to choke”.
Some other sectors are not faring well either. India's car industry is in a crisis, struggling to get out of a downward spiral with hundreds of thousands of jobs already lost and many more still at stake, according to reports. Many car dealerships across the country have shut shops as sales plummet to two-decade low, according to the Society of Indian Automobile Manufacturers, a trade body.
A total of 712,620 cars, utility vehicles and vans were sold in the latest quarter, down 18.4 per cent on the same period a year earlier, a very worrying figure for the car industry which accounts for about 7 per cent of the country’s GDP, according to Siam data. Tightening liquidity in India’s non-banking financial sector has also exacerbated the problems, as lending to consumers, including car loans slows down.
The sale of big-ticket items such as cars is not the only sector to take a hit in the latest financial quarter. Things are equally bad for manufacturers of consumer goods. Parle, India's biggest biscuit maker, says it may cut up to 10,000 jobs across its operations as the economic crisis bites.
“The economy needs booster packages to increase growth in both rural and urban sectors, and the confidence of the working population also needs to be boosted as because of the uncertainty of the future, people are not spending,” says Sameer Mittal, the managing partner at Sameer Mittal & Associates and chairman of the International Trade Council in India.
“As the current slowdown, to a great extent, is the ripple effect of the global economic slowdown and the trade war between the US and China, a large effect is seen on the export front,” he says.
The latest GDP growth figure of 5 per cent is seen as a significant setback for India, which last year was the world's fastest growing major economy.
Though the economic numbers for the latest quarter can still be viewed in positive light given what is happening in the world's developed economies. However, they are far below where they should be if the Indian government, led by Prime Minister Narendra Modi, is to make India a $5 trillion (Dh18.4tn) economy in the next five years. To achieve the target, India needs an annual growth rate of around 8 per cent, and in the process could also create enough jobs to absorb some of the million young people who enter the workforce every month, according to data from India's Labour Ministry.
However, given the current rate of GDP expansion, absorption of the new talent pool has become a major worry for
policymakers. India's unemployment rate hit a 45-year high of 6.1 per cent in the year to June, according to government figures. Stock markets have also declined over the past couple of months, tracking economic weakness.
"There has been a lot of wealth destruction for all kind of investors," says Tejas Khoday, the chief executive and co-founder of Fyers, a stock brokering company in Bangalore. "Liquidity has been trapped. At the moment widespread changes are needed." These changes are what Indian policymakers are trying to make to address the problems.
On Friday, India's Finance Ministry said 10 public sector banks would be merged with four separate financial institutions. The state-run banks have been struggling under a mountain of bad debt and consolidation could help cut costs, improve efficiency and allow better governance in a sector that has been plagued by scams and defaults, financial analysts say. Stronger, better managed, financial institutions will be able to boost lending, which is a prerequisite for the economic growth, they say.
“Considering that three quarters of saving accounts are with public sector banks and that there could be significant cost savings by these mergers, we do see this to be positive for the sector from a longer term perspective,” says Abhimanyu Sofat, head of research at IIFL Securities in Mumbai.
Among the lenders lined up for mergers is Punjab National Bank, which last year reported a $2 billion fraud, in which celebrity jeweller Nirav Modi is accused of being involved.
The Indian government last week also announced steps to attract more FDI, which in general helps generate jobs and growth. This move included easing regulations for foreign single brand retailers in terms of the requirement for sourcing goods from India, as well as allowing 100 per cent FDI into the coal mining sector.
Last week, New Delhi announced measures to support the car industry, including lifting a ban on government departments buying new cars.
The Reserve Bank of India also said it would transfer 1.76 trillion rupees of surplus reserves to the government. This decision came after the central bank and the government last year were locked in a public dispute over issues including pressure to transfer funds to New Delhi, which resulted in the resignation of the then governor of the central bank, Urjit Patel, in December.
In the RBI’s annual report, released on Thursday, it underlined reviving consumer spending and private investment as priorities for India and said infrastructure investment will help the economy in longer term.
Businesses are expecting more stimulus packages to come in the next few weeks and months.
“The economy could definitely do with a boost and government investment,” says Manish Chowdary, the co-founder of Fit & Glow, a cosmetics company from Bangalore. While the markets await new stimuli, they are also awaiting further rate cuts by RBI, arguing the slowdown warrants further cuts in borrowing costs. The central bank has already cut rates at its past four policy meetings.
With all that the government and the RBI have done so far, many analysts still do not see an immediate improvement in the rate of economic growth in Asia's third-largest economy.
“At this point it [the situation] is bleak,” says Mr Varghese. “Even if much needed real reform is brought about, it will take at least two years for the effects to show. The government needs to acknowledge the problem first and then not shy away from giving the right medicine even if it is not popular [with the masses],” he says.