Can the Union Budget on Friday reverse the slump in consumption, demand and employment? 

India should become a five trillion Dollar economy by 2024, when his government’s term ends, Prime Minister Narendra Modi said in his opening remarks at NITI Aayog’s governing council meeting on June 15. The goal was “challenging but achievable,” he said if states joined hands.

India currently is a ₹190.5 lakh crore or a $2.72 trillion economy. To achieve the Prime Minister’s ambition, the value of goods and services produced in the country over the next five years must see an 84% increase, compared to a 53% increase achieved over the past five. GDP must grow by about 15% a year in nominal terms (or prices not adjusted for inflation), as against an average annual growth rate of 10.89% over the past five.

DECLINE IN CONSUMPTION

In 2018-19, the economy grew at its slowest pace in the past five years – 7% after discounting inflation. The gloom was manifest in passenger vehicle sales. In April, their sales growth declined by 17%, the sharpest fall in eight years, the Society for Indian Automobile Manufacturers said. Within the segment, sales of passenger cars declined by nearly 20% over April 2018.

Passenger vehicle sales grew by 2.7% last year, the slowest in five years. The decline was pretty steep compared to growth in the previous two years. The industry body said the decline continued in May, though it did not say by how much.

The biggest car maker, Maruti, saw its sales fall by 22% in May, compared to the same month last year. In the last financial year, the company’s sales volume had fallen by 17%.

Commercial vehicle sales grew at nearly 18%– lower than the previous year, but respectable. An overall demand slowdown, however, will affect the segment.

Sales of consumer staples have also entered the slow lane. Market research agency Nielsen India said in a report it expected a 2-3 percentage points decline in their sales value and volume during this calendar. Urban demand is likely to be less dented than rural, which has seen a pronounced slowdown since July last year. The trend is likely to worsen if the monsoon is deficient or not well spread out across the rainy months.

Sales volume growth at Hindustan Unilever dropped to 7% in the first quarter of 2019 compared to a growth of 11% during the same quarter last year. Dabur saw its volume grow by 4.3%, slower than the year-ago quarter. Similar declines were seen at Godrej Soaps, Britannia, Bajaj Consumer Care and Marico.

“You can’t say FMCG is recession proof, but it is recession resistant,” Hindustan Unilever Chairman Sanjiv Mehta said during a press briefing after the March quarter results were announced. “People don’t stop bathing or cleaning their teeth when conditions become tough. What happens is the number of brands in a family gets reduced – instead of using larger packs they shift to more price-point packs. That’s the kind of shift that happens,” he said.

A recession In the United States is defined as two successive quarters of negative growth. But the US is a large, $19.48 trillion economy (2017) which cannot be expected to grow as fast as India. Its growth rate was 2.9% in 2018 and 2.2% in 2017. After being used to double digit growth in the last decade, a rate below 6% in India feels like a stiff contraction. In the January-March quarter of this year, it was 5.8%, which is perhaps why Mehta used the ‘R’ word.

IS INDIA THE FASTEST GROWING ECONOMY?

This is a continuation of what we have been feeling over the past five years. Though the government has been claiming that India has been the fastest growing economy, the growth figures have not been validated by felt experience. To claim that the economy grew at 8.2% in 2016-17, the year of Demonetisation, seems quite incredible. Many economists and bankers have been saying that the figures need to be independently vetted.

Arvind Subramanian, the former Chief Economic Adviser, says, in a working paper published by Harvard University’s Centre for International Development, that India’s growth may have been over-stated by 2.5 percentage points on average since 2011-12. He bases his findings on 17 parameters like electricity consumption, vehicle sales, railway freight traffic, index of industrial production and credit growth which are positively correlated with growth. On this basis, he revises India’s average annual growth rate in this decade from 7% to 4.5%, which according to him, is an economy growing “solidly but not spectacularly.”

An average growth rate of 4.5% from mid-way through Prime Minister Manmohan Singh’s second term in office is not solid, it is a disaster. Contraction of that magnitude would have been acutely felt. It is possible that Subramanian has overstated the gloom. Economists have pointed out flaws in his study but even they are agreed that growth in this decade was not furious but faltering

UNEMPLOYMENT HIGHEST IN 45 YEARS

This is reflected in unemployment data. After withholding for six months the findings of the Periodic Labour Force Survey conducted every five years, the government released it a day after the Prime Minister’s swearing in ceremony. It confirmed the data leaked in Business Standard in January. The unemployment rate at 6.1% in 2017-18, the year of the survey, was the worst in 45 years. This is the share of persons above 15 years who are out of work. The survey also said that the Labour Force Participation Rate was a low 36.9%. This is the proportion of working age people who are actively looking for jobs or those employed and want to upgrade. A low rate means unemployed people are not looking for jobs for, say, cultural reasons in the case of upper caste Indian women or because they perceive the chances of getting one are slim.

The Centre for Monitoring Indian Economy (CMIE), an independent, Mumbai-based, private research organisation, says the unemployment rate between January and April was 6.87%. This survey is more granular than the official one. It is continuous and conducted daily over a four month period after which it is repeated.

Though the Prime Minister and his party put economic issues on mute during the Lok Sabha election campaign and won a sound majority on emotional themes, they know they cannot ignore the narrative of livelihoods.

As a sign of earnestness, the government had cut the rate of contribution of employers and workers to Employees State Insurance from 6.5% of wages to 4%. This is expected to impact 3.6 crore employees and 12.85 lakh employers and reduce their cost by about ₹8,000 crore a year. It might also spur the conversion of unorganised enterprises into formal ones. Labour reforms allowing companies with a larger number of workers to close down without seeking prior government permission, and reducing the number of compliances – are also on the anvil. When Prime Minister Atal Bihari Vajpayee attempted them in 2001, there was stiff opposition. With a solid majority in the Lok Sabha, and given his wide popularity, the Prime Minister should be able to push them.