Indian economy needs a miracle for its revival

The ruling BJP government may want to live in denial but with lakhs of workers across several sectors already unemployed and many more fearing losing their jobs, the economy is beginning to extract a massive human price.

We had been hearing and talking about rural distress for a number of years, but data now indicates that we are being hit by a slowdown in urban consumption as well.India is now sitting on a pile of more than 5 lakh unsold passenger vehicles and almost 13 lakh homes, for instance. Unless there is a major intervention by the government, we could see serious urban distress in the coming months. Early signs are already visible, and they are scary.

On August 16, 2019, Ashish Kumar, a 25-year-old son of a local BJP leader in Jamshedpur, committed suicide. He was working as a computer operator in an ancillary firm that manufactured parts for Tata Motors, which had announced a block closure. He feared that with the automobile industry in acute distress, he was going to be pushed out of his job.

Highlighting the fact that Ashish’s father happens to be working with the BJP is not the point. It is just to highlight that it is not just an economic or a political problem. The expanding slowdown of the Indian economy is essentially a human problem. It is going to claim a very heavy human price and it has already started to do so.

While the Indian auto sector has been hitting national headlines as automobile sales have been on the decline over the past 9 months, distress has hardly been limited to the automobile sector. The black clouds had been gathering on the horizon over the last couple of years and it is only now that they have begun to come down, and it is turning out to be a cloudburst. The slowdown is no longer limited to the auto sector; it has become almost all-pervasive and is extracting a heavy human price.

The auto sector has been in the news for several months now and present estimates suggest that 3,50,000 jobs have already been lost till now, which is just about 1% of the 3.5 crore directly or indirectly employed in the sector. Industry insiders say that with inventories building up and a lot of working capital locked in unsold inventory, we could see more job losses coming into the sector. Most companies have already laid off a large portion of their temporary workforce and it is only a matter of time before permanent employees get the pink slip.

The decline in automobile sales is not a sudden change in direction and had been building up for a while now. The Society of Indian Automobile Manufacturers (SIAM) had pointed towards a slowdown in urban demand with car sales growing at just 2.7 per cent in 2018-19, the worst performance in five financial years.

The writing on the wall in the automobile sector is loud and clear. As of June 2019, about 5 lakh passenger vehicles valued at roughly ₹ 37,000 crore were lying unsold. The unsold inventory for two-wheelers is estimated to be around 30 lakh, valued at ₹17,000 crore, and they have reached a point where companies find it financially unviable to keep their production lines running and block more working capital into inventories. Unless the industry sees a bumper festive season with a sharp uptick in demand caused by changes in government policy, we can only expect the auto industry to haemorrhage more jobs, far from creating new ones.

If we are to understand how we got here, we need to take a closer look at the numbers and how they are aligning to tell a story of the challenges before India’s economy. The IIP numbers have been almost continuously indicating a slowdown in industrial activity because of a slowdown in demand. Data indicated that the manufacturing sector contracted 0.4% in March, while mining and electricity saw marginal increases. The situation continues to be grim and getting worse.

Real estate is another sector which reflects the economic mood among urban consumers and this is another segment which shows serious problems. There are almost 13 lakh unsold houses in the real estate sector and this is growing at 8% per annum.

A report by Business Today tells us the extent of the problem. “The inventory overhang is as high as 80 months in Kochi, 59 months in Jaipur, 55 months in Lucknow and 72 months in Chennai, implying it will take between five and seven years for developers in these cities to get rid of the present housing stock,” the report says. This means it would take upto five years for the present houses to be sold even if now new houses are built.

The impact of high unsold inventory in the real estate sector goes beyond the builders and those employed in the real estate sector. If you are a homeowner or have parked your savings in the real estate, you have probably seen a decline in the value of your holdings. The general feel in the real estate market is that we must not expect real estate rates to go up anytime soon and that would mean many urban families taking a big and considerable financial hit.

The financial cushion, to put it simply, is gone. Data now indicates that the real estate prices have seen a sharp decline since July 2018 and the negative trend is going to continue for some more time.

Consumer durables is another indicator of the consumer sentiment and that too reflects a slow-down in consumer demand. “According to Consumer Electronics and Appliances Manufacturers’ Association, TV panel sales have declined again. Sale of other home appliances like washing machines and refrigerators have seen flat growth in July, due to low consumer sentiments,” The New Indian Express reported.

While cars, real estate and consumer durables are high-value items and are considered discretionary spending, the Britannia Managing Director indicated that even FMCG brands are seeing a dip in growth and cautious about spending. “However, we’ve grown only 6% and the market is growing slower than that. And that’s a little bit of a worry, because if the consumer is thinking twice before buying even for a ₹5 product, then there is some serious issue in the economy,” he was quoted as saying.

Yoga guru Ramdev’s Patanjali too saw a decline of nearly 3% in its urban sales. While the total decline in sales is stated to be around 10%, the brand seems to be on a decline after its massive jump from ₹500 crore in 2012 to roughly ₹10,000 crore in 2017.

Media reports suggest that the decline is one of the main reasons why the brand has cut down on its advertising spends, falling out of the top 10 advertisers for the first time in many years. While almost every sector is showing a decline in sales growth and sectors like automobiles even showing a massive decline in sales, it is anybody’s guess why real urban incomes are on the decline.

While Aon’s annual salary increase survey indicated an average 9.7% rise in salaries in March 2019, the situation has changed significantly since then. The middle class had so far largely remained unaffected by rural distress, but things are changing at a very rapid pace and everyone is beginning to get worried. It was only a matter of time when rural distress would spill over to urban India and it is beginning to happen now. India Today put out some scary numbers. “Wage growth numbers paint a stark picture -- from 2008-2012, real rural wages grew by more than 6% per annum. Then, in November 2013, that trend faltered.

Between May 2014 and December 2018, real wages for agricultural labourers grew at only 0.87%, with non-agricultural labourers gaining a mere 0.23% per annum. Worse, construction workers, one of the largest labour groups outside agriculture, saw real wages falling, reducing by 0.02% per annum,” the report notes. These numbers indicate that incomes are not rising as fast as prices. Considering that the present inflation rate is 3.15%, a 0.87% rise in income would mean that the purchasing power of the average farmhand has been on the decline. Construction workers and non-farm labour were even worse off.

Since they make a very large part of our consumption base, it was only a matter of time before the impact was felt in urban India. And it is beginning to happening now. The bigger problem, however, is the decline in the savings rates and the rising debt of households.

Enough has been written about the decline in the savings rate from 23% to 17% over the last decade; there has also been a big shift in debt figures. Total household debt has increased from ₹ 3.59 lakh crore in 2013-14 to ₹ 6.74 lakh crore in 2017-18. Credit card debt and personal loans have almost doubled and an increasing number of middle-class households are spending money before they earn it, opening them up for financial distress if something were to go wrong.

The real big problem for us as a nation is that the government does not have money to put out a significant amount of money into reviving the economy. The auto industry is seeking a reduction in GST but with the government struggling to keep its ship afloat, it would take a miracle for the government to oblige and no one is sure if that would be enough to encourage people to start buying new cars and two-wheelers at a rapid pace.

Union Finance Minister Nirmala Sitharaman simply does not have the fiscal space for a stimulus, considering a ₹ 1.67 lakh crore gap between last year’s Revised Estimates and provisional actuals. Worse, the government crossed 60% of its fiscal deficit target in June itself, indicating spending cuts later in the year if it wants to stick to its targets. The Indian economy hangs by a thread. A slow-down can very quickly turn into a full blown recession and we hope and pray that it doesn’t happen. If it does, it would be terrible news for all of us. Millions would be pushed out of their jobs and it would not be restricted to the auto sector alone. Real estate, which is safety vault for most Indian families, will stop being the safety net. Thankfully, we have had 1% excess rains but this has also led to floods in large parts of the country. Farm output is expected to be good but it remains to be seen if the farmer would get a fair price for their produce.

The biggest question is if the government would be able to guarantee MSP to the farmer or will she be forced to sell below MSP, this time again. Everyone is wondering how good would Diwali be this year? Automobile companies expect a third of their sales to come during this period. Plant shutdowns in August tell us that the companies are not very confident of a good festive season but India desperately needs a good Diwali this year to keep the slowdown from turning into a recession. At the beginning of the 2014 poll season, Prime Minister Narendra Modi had marketed himself as an amateur economist who had all the answers to take India to the next orbit of economic growth. Modinomics seemed to have worked in the first few years, in what now appears to be driven by domestic debt but he changed all that by making a big bang announcement on November 8, 2016.

Going by the way things are, the Modi government would realise that winning the 2019 elections was the easy part and bearing the consequences of their own policies would not be that easy. Economics is like gravity. No matter how hard we try to defy it, it would always bring you down to mother earth. We can only hope that the landing is not too hard. As middle class Indians who work hard to provide for our families and keep our children in school, we pray that a miracle happens and we are saved from financial distress. We pray for a happy Diwali.