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Slowdown, and its fallouts

business Updated: Jun 05, 2013 02:55 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
Highlight Story

Slowdown-and-its-fallouts

What does the latest data tell us about the Indian economy?
The latest data released by the Central Statistics Office (CSO) of the ministry of statistics and programme implementation show that India’s economic growth has slumped to a 10-year low of 5% in 2012-13 proving fears of a widespread slowdown as factories are producing less, exports are shrinking, companies are offering fewer jobs and prices continue to remain high. The estimates of India’s gross domestic product (GDP) — or the value of all goods and services in the country — comes at a time when the government is caught in a tug-of-war between rising prices and sliding growth struggling to halt the slide in the economy, which until recently, was an engine for global growth. The alarmingly slow growth, worst since the drought-year of 2002-03, will also imply that India no longer remain the world’s second fastest growing major economy behind China. China’s economy grew 7.9% in 2012 while estimates put Indonesia’s growth at over 6% last year. The crippling deceleration — from farms to factories — will also mount pressure on finance minister P Chidambaram to announce growing reviving measures.

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What are primary factors that have pulled down growth?
The slowdown owes itself in large measure to a wounded manufacturing sector that barely crawled at 1% during the year. That output from India’s factories expanded at its slowest in the last 20 years bears testimony to the seriousness of the current crisis in the economy that until not-too-long-ago was leading global recovery. A patchy monsoon last year appears to have crimped food output with agricultural sector growing at slower 1.9% in 2012-13 compared to 3.6% in the previous year.

How have prices pulled down growth?
Although, inflation has moderated a tad in the last few months, whether it is the daily subzi, or the occasional dining out, or the home loan equated monthly installments (EMIs), the economic downturn is bringing bad news for Indian households eating into savings and squeezing family budgets. There are strong linkages between inflation, industrial slowdown, government deficits and employments and salary raises. Sharply rising food prices hit family budgets hard. The same amount of money now buys fewer goods. Clothing, medical care, education, travelling, communication, recreation, eating out and most services too have turned dearer over the past 12 months. While food items turned more expensive on weather-induced supply shortages, most manufactured goods and services have also turned costlier.

What about high borrowing costs? How does it affect the broader economy?
In the last three years, home loan EMIs have steadily gone up. Since they cannot be curtailed, family budgets are squeezed by cutting down on regular expenses — even on items such as clothes and consumer durables Higher prices and need to find additional money for EMIs force cuts on purchases of televisions and cars. The resultant fall in demand have hit companies, hurting their revenues, already boxed in by rising input and borrowing costs.

How has costly borrowing hurt consumer purchases?
Households putting off spending are warning signals of an economy-wide squeeze. Consumer durables’ output fell 4.5% during March, clearly mirroring what most shop-end evidence was throwing up. Spend on television, refrigerators and cars since autumn continue to remain muted, squeezed by high prices and low income growth. The fact that automobile sales contracted 6.7% in 2012-13 versus a 2.2% growth in the previous year supports the view that the erosion in purchasing power, on account of persistently high inflation and interest rates, is denting discretionary spending. One-in-five dealers in India expect to take a financial loss in 2013, more than double the number compared with 2012, and only 44 % of dealers expect to make a profit for the 2012-2013 financial year, according to the a latest survey by JD Power Asia Pacific, an automotive consultancy firm. The latest national income data show that construction output grew at a sub-par 4.4%, services output slipped to 6.6%, the lowest since the global financial crisis of 2008. Sliding growth in the ‘community, social and personal service’ category, which is a proxy for government spending, was the main driver. This likely reflects the government’s squeeze on departmental spending in the final six months of 2012-13 to narrow down budget gaps.

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How does investment suffer?
Tight monetary conditions and high inflation has hurt investment activity. Gross fixed capital formation, a proxy for investment activity, has slowed down to 29.6% of GDP (at current prices) against 30.6% last year. Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans, hurting job prospects. Companies have pruned wage bills to cut corners in difficult times, offering lower salary hikes that barely take care of rising prices.

How would the slowdown affect the government’s plans?
Sluggish industrial growth has led to deceleration in the broader economy, resulting in slower GDP growth. Slow growth can hurt government’s tax revenues that may force the government to borrow more to fund its welfare and routine activities. This can upset fiscal plans ahead of the budget.

What steps can the government take to revive the economy?
One of the surest ways to revive a sagging economy is to prompt households to spend more. In the time of high prices, the best way to achieve that is by giving more money in people’s hands through tax breaks. It’s also critical to fast-track roads, ports, airports, and railways projects to create jobs and raise non-farm incomes. It’s also important to catalyse large scale industrialisation across India. The 1,483-km long Delhi- Mumbai Industrial Corridor and few other such projects should be accorded highest priority that can potentially spin millions of jobs.

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