Finance Minister Nirmala Sitharaman's measures to arrest the economic slowdown are more incremental in nature. The measures have disappointed all those who were rooting for a fiscal stimulus. The government probably thinks the current slowdown is more cyclical in nature and not structural. But the fact is that the economy is slowing down big time. The slowdown probably continued from the last years of UPA-2 when the GDP slumped. Later, demonetisation, the launch of GST and the new bankruptcy code broke the back of the economy.
The GDP numbers are now connecting the earlier dots to show that there are deep-rooted weaknesses in the various engines of the economy. For the first time, industrialists are coming out in the open to nitpick economic distress. L&T's AM Naik, Bajaj Auto's Rahul Bajaj, HDFC's Deepak Parekh among others have said that the economic slowdown is hurting their sectors as well as the economy. GDP in Q4 of FY2019 has crashed to a low of 5.8 per cent. The first quarter (April-June) of FY2020 is expected to be around 6 per cent.
Niti Aayog Vice Chairman Rajiv Kumar has also acknowledged that the current economic slowdown is unprecedented. Do Sitharaman's measures pass the test of Niti Aayog's comment of 'unprecedented' slowdown? It doesn't seem to. There are structural weaknesses in the economy that are hurting the growth momentum. The disruption by way of new technology and digitisation is making life difficult for well established traditional businesses. There are fundamental shifts taking place in the economy, contributing to job losses, subdued economic activity and slowdown.
So what are the problem areas?
Structural weaknesses in economy
Savings are the lifeblood of an economy. The virtuous cycle starts from savings, investments and exports starts from savings. In the last few decades, there has been a gradual fall in the overall savings rate in the Indian economy. The savings rate fell from 35 per cent of GDP two decades ago to 30 per cent now. The biggest reason for such a decline is household savings have come down from 23.6 per cent to about 17 per cent in the same period. Financial savings are also declining over the years. In fact, financial liabilities are rising as more people are taking on debt to make high value purchases. There is also a structural shift from bank deposits to other financial assets like mutual funds, insurance etc. The economy needs higher level of savings for improving investments, which in turn creates economic prosperity and jobs. The consistently falling savings rate is negatively impacting domestic economy.
Also, there is also a technology and digitisation element, which is disrupting traditional businesses. In fact, business disruption is demolishing many old businesses that not only supported growth but also provided employment in the past. According to an Accenture study, more than 44 per cent of companies across 19 industries are experiencing disruption currently and 38 per cent are highly susceptible to future disruption. The size of this disruption and susceptible to future disruption of companies is to the tune of $1.8 trillion. Moreover, efficiencies through digitisation are reducing the work force in many organisations, which has a negative impact on savings, investments and spending.
In terms of credit delivery, there has been a structural shift from the development finance institutions (DFIs) to banks. DFIs did the financing of project loans right from inception whereas banks focused on working capital loans, financing to SMEs and retail customers. There were many DFI veterans who warned two decades ago about the dangers of banks doing the DFI role or long- term project finance role. ICICI Ltd, IDBI Ltd and IDFC all got converted into banks. Many DFI veterans during the early 2000 decade talked about how banks with short-term funds are not well equipped to do long-term financing or project with long gestation. The results are now visible with banks saddled with bad loans in large projects. The reality is finally settling in with banks who are now talking about not doing infra or large project loans. Many banks are now staying away completely from infrastructure loans. These structural issues have a very negative impact on the economic activity. Who will fund infrastructure projects or large projects with long gestation period?
Fundamental shifts in economy
There have also been some big fundamental shifts in the economy. Take for instance, the new bankruptcy code, which while being progressive, has resulted in thousands of companies landing at the NCLT courts for restructuring or liquidation. There are hundreds of liquidation cases. While the bankruptcy code is helping create a good credit environment, there is also collateral damage. It has killed many enterprises; there is a loss of entrepreneurship and there big job losses. Many suggest this is the price the economy has to pay as India shifts to a new regime of better credit standards, promoters fearing from defaulting on loans and creditors or lenders also making money on their loaned money. But inadequate infrastructure, lack of buyers' interest especially private equity or distressed funds and legal delays is creating problem of its own for the bankruptcy code. These things will get streamlined in the near future, but the new code will create a new credit culture in the economy.
In terms of loan distribution, the big policy change of government in supporting micro and small entrepreneurs ( by way of Mudra and other schemes ) is making a fundamental shift from medium to micro and small entrepreneurs, who are not necessarily creating employment or value creation. Similarly, there is an institutional framework of small finance banks (SFBs) that is supporting micro loans. The multiplier effect of these loans won't be big and hence it will not give a big push to economic activity, at least in the near future.
Future value creators in the economy
A big structural shift is taking place because of new business models such as aggregators in hospitality, transportation etc. The rise of aggregators has impacted the formal sectors. The aggregators in hospitality have unlocked a huge market for individuals (owning flats, bungalows) and smaller hospitality players to get ready customers. There are many questions on whether the money going to these new segments is rightly getting reflected in the formal economy. Similarly, car and two wheeler makers in the last 3-4 years saw huge buying coming from people employed in the unorganized sector with the arrival of Ola and Uber. That demand is now slowing down. The arrival of metro in various cities will also contribute to lower sales of automobile. SBI Chairman Rajnish Kumar recently asked that this trend (people using cabs) should be analyzed to see how much of it is affecting car sales. He also asked how electric cars and BS-VI norms are holding back car sales. Similarly, there was a huge demand from individuals for two-wheelers as delivery boys from Amazon and Zomato. This demand is now contracting. The money earned by such individuals generally go for consumption and doesn't lead to more real investment in the economy.
There is also a new concept of renting in real estate which is gaining place. The young generation prefers to live on rent or drive a rented Zoom car rather than making a large purchase. Will this have some impact in the economy in future if such a behavior of people scales up? These new changes which are futuristic in nature could impact demand in real estate, construction and automobiles, which are major contributors to economic growth.