Economic slowdown, Policy reforms and Politics

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Finance Minister Nirmala Sitharaman

India is one of the fastest growing (economies) and has the skilled manpower and a government working towards reforms. Investors can find no better place in the world than India because it has a democracy loving, capitalist respecting environment. The government is interacting with the industry and investors on a continuous basis and as a result we don’t have a trust deficit, the Finance Minister told investors in America. – Nirmala Sitharaman, Indian Finance Minister, addressing investors at IMF headquarters in Washington DC.

Home Minister Amit Shah

Obviously hinting at but without naming Subramanian Swamy, when a TV editor asked why Prime Minister Narendra Modi led NDA Government at the Centre does not have a reputed economist as Finance Minister, ruling BJP strongman and Home Minister, Amit Shah responded on a television news channel, on Wednesday, 16 October 2019, by stating: “We all know what people think about acclaimed economists. That’s why we chose to have a party worker in that position.” Giving full credit to the Finance Minister for tackling the economic slowdown and describing it as a global phenomenon, Shah said Nirmala Sitharaman is working hard, travelling across the country, meeting business people, auditors and chartered accountants and on their advice, reforms are being introduced and growth oriented policies are being implemented.

After the BJP led NDA came to power with a thumping majority for a second term in a row in May 2019, global economic activity has weakened due to several reasons. These include escalation of trade tensions, especially between the US and China; the tug of war on Brexit; volatility in crude oil prices that got bolstered in mid-September by the attack on Saudi Arabian oil facilities and disruption to global oil supplies; and the overall impact on financial markets due to the depreciation of the Chinese renminbi in early August and geopolitical and economic events at the broad level.

Domestically also, the slowdown in economic activity that started last year has extended beyond the first half of 2019-20 and well into the Diwali season which has always been marked by people splurging in a big way but this year, Diwali sales are at rock bottom and the shopping areas are desolated. Due to weak private consumption, real GDP growth fell to a 25-quarter low in Q1:2019-20 in India.

Certainly this is a recipe for politics and the opposition is losing no chance to treat the Finance Minister as a punching bag. The social media is packed with two liners mocking demonetisation during NDA-1. A joke has gone viral these days. It goes like this: “who says there is an economic slowdown and cars are not selling. It’s a trash projection, because only the other day my neighbour has sold two of his three cars.”

Global slowdown

The global slowdown has compelled Central banks across countries, both advanced economis and emerging market economis, to ease their monetary policy. In August, the Reserve Bank’s Monetary Policy Committee reduced the policy repo rate by a further 35 bps to 5.40 per cent on signs of accentuation of the slowdown in domestic activity amidst deteriorating global growth.

In the recent months, the nominal exchange rate (Indian rupee, INR vis-à-vis the US dollar) has depreciated further from its April level, especially during August, due to a drop in the Chinese renminbi below the level of 7 yuan per US$ in the wake of an escalation in US-China trade actions (renminbi is the official currency of China where it acts as medium of exchange, the yuan is the unit of account of the country’s economic and financial system).

A generalised flight to safety towards the US dollar assets and portfolio capital outflows also amplified pressures on the rupee. The rupee came under renewed pressure in mid-September following the spike in crude oil prices.

Consumer Price Index

According to professional forecasters surveyed by the Reserve Bank in September 2019, Consumer Price Index (CPI) inflation is expected to increase from 3.2 per cent in August 2019 to 3.9 per cent in Q4:2019-20 and to 4.0 per cent in Q2:2020-21.

What is a matter of serious concern in India is low consumer confidence, ebbing of sentiments on the general economic situation and the employment scenario. Sentiment in the manufacturing sector have also dipped for the current quarter and this will leave a spiraling impact on expected production, order inflows, capacity utilisation, employment conditions and exports.

Still, the economic slowdown not withstanding, In the September 2019 round of the Reserve Bank’s survey (conducted by the Reserve Bank in 13 major cities, based on responses from 5,192 respondents and professional forecasters real GDP growth is expected to recover from 5.0 per cent in Q1:2019-20 to 7.2 per cent in Q4:2019-20 and then moderate to 7.0
per cent in Q2:2020-21.

Private consumption

Private consumption, which all along has supported economic activity, is now beginning to slow down due to a host of factors. If we consider the constituents of GDP, private final consumption expenditure (PFCE), the mainstay of aggregate demand, slumped, with its growth plummeting by over four percentage points in Q1:2019-20 to an eighteen-quarter low.

Over the last six months (March-August 2019), consumer price index (CPI) inflation trailed below the target of 4.0 per cent averaging 3.1 per cent over this period. Food inflation for that matter went up by 230 basis points between March and August 2019.

Rising trajectory of inflation during March to June 2019 was marked by a sustained increase in price momentum but it was blanced by a low base effect due to subdued domestic demand,especially pertaining to non-essential items, and as a result overall inflation got crubed August onwards.

High frequency indicators of urban demand have weakened in recent months as reflected in contraction in sales of passenger vehicles and production of consumer durables.

Passenger car sales

Passenger car sales have contracted by double digits every month since April 2019, resulting in major car producers suspending factory production. The growth in household credit for vehicles extended by banks also has gone down in recent months.

Various indicators of rural demand have also remained weak. Motorcycles and tractor sales, for example, contracted in July and August. The sales growth of fast moving consumer goods (FMCG) companies, a sizeable part of which occurs in rural areas, has also been sluggish.

A slowdown in passenger car sales was also observed in the US, the Euro area, China, South Korea and Japan for a variety of reasons.

These are:
(i) stricter emission norms in China and the Euro area;
(ii) mandatory sales of electric vehicles by car makers in the Euro area;
(iii) tepid demand due to subdued global growth; and
(iv) depressed consumer confidence from escalating US-China trade tensions.

Government final consumption and GDP growth

Government final consumption expenditure (GFCE) cushioned the deceleration in aggregate demand. Excluding GFCE, real GDP growth would have slid down to 4.5 per cent in Q1:2019-20. Gross fixed capital formation (GFCF) remained weak in Q1:2019-20.

The inflation trajectory in 2019-20 so far has been characterised by rising food inflation, with price build-ups close to historical averages and well above levels observed in recent years.

Export growth has also decelerated considerably in Q1:2019-20 in an uncertain external trading environment rendered hostile by trade tensions.

Gross capital formation in India has also decelerated since 2011-12 due to a slowdown in investment by the private sector. The slowdown in investment activity also has been reflected in a decline in financial flows from banks and non-banks to the commercial sector.

April-August 2019, the fiscal position of the central government strengthened as the gross fiscal deficit (GFD) and revenue deficit (RD) improved vis-à-vis the corresponding period of the previous year in terms of budget estimates (BE), mainly due to lower growth in expenditure. Total expenditure of the central government in the current fiscal year so far has been driven by revenue expenditure. On the receipts side, Income Tax collections gained traction during April-August 2019. Notwithstanding month-over-month fluctuations, the GST collections also grew by 4.9 per cent (y-o-y) during April-September 2019.

Non-tax revenue has been an important source of finance for the central government. During April-August 2019, this component witnessed steep growthdriven by the surplus transfer from the Reserve Bank. At the level of the States, as the focus is more on reduced capital spending and meeting the targets of fiscal deficit, there is reduced capital spending and this has adversely affected investment. Therefore, the challenge before the governments both at the Centre and the States is to adhere to budgeted capital spending and revenue generation targets. Particularly in States, due to a slowdown in constructiona activity, stamp duty collection has got squeezed and this has had an impact on direct tax colelction by States.


The slowdown in industrial activity that set in from Q2:2018-19 deepened further in Q1:2019-20. A sharp deceleration in manufacturing GVA in Q1:2019-20 essentially reflected weaknesses in the organised sector.

The capital goods sector has also contracted for many successive month due to contraction in commercial vehicles, tractors and printing machinery.


Overall business sentiment in the Indian manufacturing sector also has deteriorated recently due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins.

Service Sector

In Q1:2019-20, services sector growth was the lowest in the last seven quarters, pulled down by financial, real estate and professional services, and construction activity.

Trade,Transport & Communication

Trade, hotels, transport, communication and services related to broadcasting maintained momentum, though transport services indicators have weakened significantly in the recent period.

Residential real estate

In the residential real estate sector, both sales and new launches contracted in Q1:2019-20, indicating sluggish demand

After the declaration of election results, both revenue and capital expenditure picked up significantly during July-August 2019; almost 40 per cent of budgeted capital expenditure for roads and highways was incurred in the month of July 2019.

Domestic financial market

While money markets witnessed swift and complete transmission, the moderation of yields in bond markets was interrupted by domestic and international factors in August. Equity markets made handsome gains in Q1, with the election related uncertainty coming to an end, but suffered losses on geo-political developments, poor corporate performance and weakness in macroeconomic indicators in Q2.

Credit quality

Credit quality has deteriorated with both the stressed assets ratio and the non-performing assets (NPA) ratio increasing further in June 2019 after four successive quarters of decline. Overall, financial flows to the commercial sector in 2019-20 (up to mid-September) have been lower than in the same period last year

Policy reforms

The overall slowdown has led the NDA Government to push reforms for economic gowth. Moving in this direction, Government of India has only recently (second fortnight of September 2019) decided to forgo total revenue of Rs. 1,45,000 crore by bringing in the Taxation Laws (Amendment) Ordinance 2019 to make certain amendments in the Income-tax Act 1961 and the Finance (No. 2) Act 2019. In order to promote growth and investment, a new provision has been inserted in the Income-tax Act during the current financial year to allow any domestic company the option to pay income-tax at the rate of 22%. The effective tax rate for these companies shall be 25.17% inclusive of surcharge & cess. Also, such companies shall not be required to pay Minimum Alternate Tax.

For attracting fresh investment in manufacturing and boosting ‘Make-in-India’ initiative of the Government, another new provision has been inserted in the Income-tax Act. It allows any new domestic company incorporated on or after 1st October 2019 and making fresh investment in manufacturing, the option to pay income-tax at the rate of 15%.

In both cases, a company that does not opt for the concessional tax regime and avails the tax exemption and incentive shall continue to pay tax at the pre-amended rate but they will have the right to opt for the concessional tax regime after expiry of their tax holiday/exemption period.

The governmenet also has gone in for policy reforms on foreign direct investment (FDI), upfront release of funds for recapitalisation of public sector banks (PSBs), merger of PSBs, incentives for exports and real estate.Also to check downside risks to the baseline growth path, steps are being taken for faster resolution of stressed assets, and a faster pace of transmission of past repo rate cuts by banks to their lending rates. All this is essential as global growth could turn out to be weaker if there is further escalation of trade tensions in 2020 due to combination of many different factors.

To catch up with the advanced economies and add momentum to the “Made in India” policy, the scope of corporate social responsibility (CSR) has been expanded. Now CSR 2% fund can be spent on incubators funded by Central or State Government or any agency or Public Sector Undertaking of Central or State Government, and, making contributions to public funded Universities, IITs, National Laboratories and Autonomous Bodies (established under the auspices of ICAR, ICMR, CSIR, DAE, DRDO, DST, Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine aimed at promoting SDGs.

Magnificent Madhya Pradesh

In this backdrop, Madhya Pradesh Government has organised a one-day Magnificent Madhya Pradesh investment meet at Indore on Thursday, 18 October 2019. Inaugurating the Convention Centre for this event, State Chief Minister Kamal Nath said that the State government will take all possible steps to make Madhya Pradesh an ideal state for industrial investment.

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