India looks to fuel economic engine to prevent growth from stalling

GDP growth slowed to 4.5 per cent in the three months to the end of September, down from 7 per cent in the same period last year

An electric auto-rickshaw driver drives along a road looking for passengers in the old quarters of New Delhi on November 30, 2019. / AFP / Jewel SAMAD
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Indian business leaders are hopeful that the economy will start to pick up over the coming months, if the government continues to take action to address the slowdown, after the latest quarterly data revealed that growth hit a six-year low.

Official figures released on Friday showed that gross domestic product growth slowed to 4.5 per cent in the three months to the end of September, down from 5 per cent in the previous quarter and 7 per cent in the same period last year.

“The government has taken a series of measures in recent months to infuse greater energy into the economy and we are hopeful that in the second half of the current fiscal year things would improve,” says Sandip Somany, president of the Federation of Indian Chambers of Commerce and Industry, an association representing businesses in India.

However, he says more reforms are needed to ensure a revival in the economy.

“We need to use this period of slow growth to take some more bold reform measures as seen in the recent past,” he says, adding that sectors in need of help include real estate, telecoms and the car industry.

The latest figures are worrying for India, given that the consensus is that the country needs economic growth levels of 8 per cent or more to create jobs for the millions of young Indians who are entering the workforce every year, and to be able to lift people out of poverty.

GDP growth has slowed because of factors including sluggish private investment, while the numbers released on Friday also showed that manufacturing contracted 1 per cent year-on-year in the July to September quarter.

But Kiran Mazumdar Shaw, the chairperson and managing director of Biocon, a biopharmaceuticals giant, wrote on Twitter that India “can quickly rise to the top again with a few pragmatic policies”.

DK Aggarwal, president of the PHD Chamber of Commerce and Industry, a body to promote industry, trade and entrepreneurship, says “a string of reforms undertaken during the last few months will refuel the growth trajectory of the country and we are very much hopeful that growth will rebound in the next quarter”.

But not all economists believe that things are looking up and some say that GDP growth could slow even further.

“We are afraid that expectations of better growth in the financial year third quarter (October to December) may not pan out,” says Nikhil Gupta, the chief economist at Motilal Oswal Financial Services, based in Mumbai. “Leading indicators suggest that October festival month was the worst in the current cycle. We believe that growth could weaken further to around 4 per cent in the third quarter.”

The slowdown represents a sharp fall from last year, when India claimed the title of the world's fastest growing major economy.

This year, unemployment levels have soared and there have been hundreds of thousands of job cuts in India's car industry amid weakening consumer demand.

A vegetable vendor weighs vegetables at a market in Lucknow, India, Saturday, Nov. 30, 2019. India’s economic growth slipped to 4.5%, its slowest pace in six years, in the July-September quarter, with the labor-intensive manufacturing sector contracting.(AP Photo/Rajesh Kumar Singh)

With Narendra Modi's government under pressure to tackle the situation, New Delhi has taken a series of steps in recent months in an effort to stimulate the economy.

These include slashing corporate tax to 22 per cent from 30 per cent in September.

It also announced a $1.4bn real estate fund to help the ailing property sector, aimed at providing last-mile financing to complete stalled housing projects.

Other announcements to improve the economic situation have included plans to merge ten state-owned banks into four in a bid to streamline the banking system and boost credit flow. India's public sector banks have been burdened with bad loans and there have been mounting concerns about governance. The finance minister, Nirmala Sitharaman, over the past few months has also announced measures to help the struggling car industry and exports sector.

The impact of these efforts will take time to filter through, analysts say, but they may not be enough to bolster the economy.

“Stronger fiscal stimulus is required to stem this fall, without which [GDP growth] could be still lower as we move into the next financial year,” says Joseph Thomas, the head of research at Emkay Wealth Management, a financial services firm headquartered in Mumbai. “Measures to stimulate demand need to be taken immediately, in the absence of which counter-cyclical actions may not bear fruit.”

A staff fries 'puri', a traditional breakfast, beside a road in front of a restaurant in the old quarters of New Delhi on November 30, 2019. / AFP / Jewel SAMAD

This could mean that India may need to deviate from its fiscal deficit target, some analysts say.

“The recent breakthrough in reform measures is commendable as the steps taken by the government would give a significant boost to the business and consumers’ sentiments in the coming times,” says Mr Aggarwal. He explains that the government should now introduce further reforms in areas including land acquisition and labour laws, in order to help improve the ease of doing business as well as increasing investment and employment generation. Lowering personal income tax would also help boost consumer demand, he adds.

“Going ahead, further reforms in ease of doing business at the ground level, especially for small and medium-sized businesses, would be crucial to strengthen the manufacturing sector,” says Mr Aggarwal.

The central bank, the Reserve Bank of India, has also made efforts to spur the economy by cutting interest rates at five consecutive meetings. The next policy meeting will be held this week, and following the latest data, there are hopes that it may cut interest rates again.

But a credit crisis stemming from the non-banking financial sector, combined with challenges surrounding the broader global economy, have many worried that India will not be able to immediately revive its economy.

“Contagion from the crisis in non-bank financial companies could also further impair the balance sheets of some public sector banks,” says Rajiv Biswas, the Asia Pacific chief economist at IHS Markit. “Given the process of strengthening bank balance sheets has already been slow and protracted, India’s financial sector problems are likely to remain a drag on the pace of economic growth over the medium-term outlook.”

There is also the fact that some economists believe India's official data overstates its growth figures.

Ratings agencies and banks have downgraded their own forecasts for India's full year growth.

State Bank of India, the country's largest lender, forecasts that GDP growth will only hit 5 per cent in the current financial year to the end of March, down from an earlier projection of 6.2 per cent. Its earlier estimate had been 6.1 per cent. It does, however, expect the economy to pick up its pace to 6.2 per cent in the first quarter of the next financial year.

Further reforms in ease of doing business at the ground level, especially for small and medium-sized businesses, would be crucial to strengthen the manufacturing sector

Another blow came earlier this month when Moody's downgraded its sovereign rating outlook to “negative” from “stable”, citing “increasing risks that economic growth will remain materially lower than in the past”.

“While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation, and, more recently, a credit crunch among non-bank financial institutions have increased the probability of a more entrenched slowdown,” according to Moody's.

Rakesh Mohan Joshi the research head and professor at the Indian Institute of Foreign Trade, a public business school set up by the government, said the government is not solely responsible for an economic slowdown, citing “a variety of factors such as international economic upheavals, trade patterns and demand, financial markets and sentiments”.

But he adds that the government “plays a very significant role in facilitating economic activities and promoting trade and investment”, and therefore needs to take swift action.

India's government urgently needs to promote investment and “should focus on creating employment, increasing consumption and market demand on an urgent basis before the situation becomes out of control”, says Mr Joshi.

But ultimately, there are factors that remain beyond the government's control, he adds.

“The revival of economic buoyancy depends upon the swiftness and effective measures taken by the government and its implementation on one hand and the international economic situation on the other.”