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Caught between a rock and a hard place

Rising prices, a falling rupee and sliding investment are denting the economy, which until recently was an engine for global growth. This, in turn, is reducing the pace of expansion across sectors. Gaurav Choudhury writes.

business Updated: Sep 04, 2013 02:38 IST
Gaurav Choudhury
Gaurav Choudhury

The latest data show that India’s economic growth slumped to a four-year low of 4.4% during April-June 2013. HT looks at the interplay of forces behind the slowdown:

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 four-year low of 4.4% in April-June 2013, proving fears of a widespread slowdown as factories are producing less, exports not growing fast enough, 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 pincer attack of rising prices, falling rupee and sliding growth denting the economy, which until recently was an engine for global growth. The alarmingly slow growth is the worst since the January-March 2009. The crippling deceleration will also mount pressure on finance minister P Chidambaram to announce growing revival measures.

What are the primary factors that have pulled down growth?
The slowdown can be blamed largely on a wounded manufacturing sector that declined 1.2% during the three months ended June 2013. This implies the seriousness of the current crisis in the economy that until not too long ago was leading global recovery.

Can normal monsoon rain turn the economy around?

The government believes it can. There is more to the summer rains than the romance of pitter-patter. Besides providing relief from a sticky summer, the monsoon is also the lifeblood of India’s economy. With the economy battling to claw out of a sharp slowdown and the rupee at historic lows suggesting another round of inflation, the mood is not just right for an interest rate cut. India’s agriculture output grew 2.7% during April to June this year, down from 2.9% last year, latest data released last week showed. When rain-dependent farm output is robust, rural income, and therefore, spending on almost everything – television sets to gold, from personal care products to processed food – goes up. This creates demand for manufactured goods, which in turn, helps the general economy. A normal monsoon could, thus, well turn out to be perfect antidote for an economy hit by a crippling industrial slowdown. For instance, rural buyers account for close to 40% of India’s total motorcycle sales. Likewise, about 40% of India’s cement demand comes from rural housing.

What about high borrowing costs? How does it affect the broader economy?
In the past three years, home loan EMIs (equated monthly installments) 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 the 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. Consumers, hit by flat income growth and rising prices, have also put off discretionary spending. Private final consumption expenditure – a proxy for household spending — grew just 1.62% during the quarter against 3.8% in the previous quarter and 4.3% in the same period of the previous year. Consumer durables output fell 12.6% during April to June, mirroring what most shop-end evidence was throwing up. Spends on television, refrigerators and cars continue to remain muted. The fact that automobile sales contracted 7.4% in July, the ninth consecutive monthly sales decline, shows how high inflation and interest rates are denting discretionary spending. Elevated prices —retail inflation was 9.64% in July — have hurt family budgets hard, especially at a time when thousands of factories and firms in India, squeezed by costly input and borrowing costs, have offered meagre salary hikes and are holding back expansion and hiring. This is quite unlike the earlier pre-poll crisis year of 2008 when consumer goods, propped up by pay hikes and tax giveaways, posted twice the growth rate of the overall industry. The option of windfall transfer payments to boost purchases isn’t available this time around.

What about investment?
Tight monetary conditions and high inflation have hurt investment activity. Gross fixed capital formation, a proxy for investment activity, has slowed down to 32.6% of GDP (at constant prices) during April to June against 33.8% 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 the government’s tax revenues that may force the government to borrow more to fund its welfare and routine activities. This can upset fiscal plans in an election year.

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 railway 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 the highest priority because they potentially can spin millions of jobs.

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