Economic slowdown is spreading and govt should stop living in denial

With most high-frequency data now having been reported for the December quarter, we can take stock of the state of the economy. There are about 20 high frequency (monthly) data points that I track for the Indian economy. Fourteen of them are volume indicators and half a dozen are value indicators.

In the September quarter of last year, 9 of these 20 indicators had declined on a year on year basis, up from 6 in the June quarter. In the December quarter, 11 of these indicators have turned negative – declined on a year-on-year basis. Of the 14 volume-based indicators, 9 were negative (declined on a year on year basis) in the December quarter as against 7 in the September quarter. The median year-on-year growth in these 20 indicators was negative 0.1 percent in the December quarter as against a growth of 0.6 percent in the September quarter. The table below summarises the data:

Source: IndiaDataHub.com. * Year-on-year subscriber addition in millions. ** 4QCY19 average is for the months of October and November.

If we just look at the manufacturing sector, data reveals a similar picture. In the June quarter of last year, 13 of the 23 manufacturing segments (as per the Index of Industrial Production) had seen negative growth. In the September quarter, this increased to 15 segments. And in the December quarter, this increased to 17 segments. More than two-thirds of manufacturing segments saw negative year-on-year growth during the December quarter!

What the data is telling us is that the economic slowdown is spreading in terms of its breadth, that the slowdown is becoming broad-based. And that is a worrying trend. The saving grace is that the intensity of slowdown in some sectors has eased. This is most notably visible in the automobiles sector where sales did not fall as sharply (or grew marginally) in the December quarter as they did in the September quarter. But the auto sector has its own separate dynamics due to the transition to BSVI from April. Thus, it is not clear how much of this ‘recovery’ reflects underlying demand and how much inventory management by the OEMs. So, we cannot take much solace from this statistic either.

The context for the discussion above is the 4.5 percent GDP growth during the September quarter. The CSO will release the GDP growth for the December quarter on Friday. And a review of the data above suggests that if anything, the growth was weaker during the December quarter than during the September quarter. Thus, likely, we will see another quarter of sub 5 percent GDP growth with a reasonable probability growth dropping to say 4 percent for the December quarter. But even if the reported growth for the quarter is marginally higher than the preceding quarter, what should worry policymakers and analysts is the weakening breadth of activity.

The last time the economy saw two consecutive quarters of sub 5 percent growth was more than a decade back during the Global Financial Crisis of 2008. But during that episode, the economy saw an abrupt fall in growth and a quick ‘V’ shaped recovery. The abrupt fall as also the sharp recovery was largely driven by external factors. This time around, there is no external drag on growth and no ‘V’ shaped recovery driven by global factors on the horizon. This creates the risk of a more prolonged slowdown in the economy and that has consequences of its own because it can feed into expectations (of businesses).

Decisions over whether a new investment is to be made or a new product to be launched or a company to be acquired, are made based on what the business expects to happen in the future in terms of demand and cost and competition. If a business expects growth to be strong, it is likely to consider new investments or new products or hiring more people. But if a business expects economic activity to be weak, it is more likely to think in terms of cost cutting rather than expanding its balance sheet. Post elections, most investors and businesses were expecting the economy to return to a sustained 7-8 percent plus GDP growth in a year or two. The slowdown was widely presumed to be a temporary blip. But the longer growth remains weak, the more expectations are likely to change from this is a temporary blip to this is the new normal. So, if a business must adjust downwards its expectation of medium-term growth from say 8 percent to 5 percent, it must reassess its growth plans. Goes without saying that a downward adjustment to future growth will mean either a cancellation or postponement or curtailment of growth or investment plans which translates into lower investments and hiring. It will be one more drag that the economy will have to contend with. And this adds a sense of urgency to ensure that low growth rates do not get entrenched into expectations.

So, what should the government do? At a very meta level, there are two things the government ought to be doing. The first is to accept that there is a problem. It cannot live in denial. The budget, for instance, made no reference to the economic slowdown. The second is to work on a template or a plan. The two big decisions that the government announced after it came back to power - reducing the corporate tax rate and the National Investment Plan – are both welcome steps. But they do not appear to be part of a bigger strategy or economic vision. Because on the flip side you have seen the policy drift in dealing with Public Sector Banks continue and the mess in the telecom sector is still unresolved. The feeling one gets is of a slightly lackadaisical attitude punctured by a positive policy decision every few months. This does not inspire confidence. And that is the problem.

Ashutosh Datar is the Founder of IndiaDataHub.com, an online platform that brings together all the public data (economic, social, financial) concerning India in a user-friendly analytical app. Before founding IndiaDataHub, he was with IIFL Institutional Equities for over a decade as their Strategist and Economist. Read his columns here.