India is seeing tight domestic conditions, tardy consumption and income growth


For an economy, rarely do endogenous and exogenous headwinds converge at scale, and now is one such time. On the endogenous side we are seeing tight domestic conditions, limited fiscal latitude, and tardy consumption and income growth.

That would mean the much-delayed private investment cycle gets pushed back further, even as tax collections become a challenge this fiscal that, in turn, further narrows the fiscal scope for counter-cyclical measures.

On the exogenous side, global growth is declining worryingly – US manufacturing activity contracted for the first time in three years in August, after five straight months of decline, according to the Institute of Supply Management data – even as the US-China tariff and currency wars intensify.

A currency war is a double-edged sword for India, since a sharp fall in the rupee would boost exports but also bloat India’s oil bill.

In that context, recent measures announced by the government were much needed. They come just as GDP growth declined sharply in the first quarter of this fiscal, and importantly, of late, sentiment seems to be falling faster than growth. And sentiment, after all, is the trigger for both consumption and investments.

Of course, it’s axiomatic that raising the fiscal deficit beyond what was budgeted by spending away would boost consumption and trigger investments. But so far, the government has leant on prudence than profligacy.

That takes away the fiscal lever of growth, and consequently, the onus lies on monetary policy.

The great thing is, the Reserve Bank of India has hit the ground running with the 35 bps rate cut first, and then by issuing a diktat to banks on Wednesday to link home loan rates to the repo rate or an external benchmark from October 1, 2019. This can structurally improve transmission of policy rate cuts to lending rates.

Coming back to the economic ailments, for some time now, there has been much to worry over the four key components of India’s GDP – consumption, investments, government spending, and net exports. The sluggishness in private consumption could be explained by a number of factors including a possible income slowdown and cost increases, amid other challenges in the automobile sector, slowing activity in real estate, and an overall dent in consumer sentiment.

Add to this the fact that households have been dipping into their savings in the recent past, and also leveraging themselves. This underlines constrained spending ability.

To boot, much of the current cyclical slowdown has affected sectors that are large employment generators, suggesting that incomes and/or employment growth in these might have suffered. For example, CRISIL Research’s analysis of 750 companies, where consistent data on quarterly employee cost is available, indicates that per employee cost has moderated to a 5% growth after growing on an average at 10% for the past few quarters.

In manufacturing linked sectors, employee cost growth has mirrored slowing sales growth. As for services sector, growth in employee cost has been stagnant despite sharp revenue growth.

For the farm economy, the terms of trade also worsened over time because of higher non-food inflation even as produce prices fell. To boot, both agricultural and non-agricultural wage growth has remained tepid.

Consequently, lower rural incomes have also hit consumer spending. Commentary from leading FMCG companies indicate that the rural market, which was growing twice as fast as urban, is now apace.

To be sure, some consumption spurs are also on the horizon:

After the initial scare, rains are now in surplus. While floods would mean some setback to kharif crops, healthy groundwater and reservoir levels bode well for the rabi crop. The combined effect would be that overall agriculture growth for the year should not be a cause for worry.

Ongoing corrections in the tax regime, and clarity on policies such as for start-ups, were also essential to woo big investments. On the farm side, the move to remit Rs 6,000 per month to poor farmers, improving agriculture’s terms of trade, and rise in farm prices should augur well.

So while course correction has begun, India clearly needs a lot more – including out-of-box incentivisations and game changers across the ecosystem – to not just sail past the choppy waters, but structurally hasten growth.

DISCLAIMER : Views expressed above are the author’s own.


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