Back15 ways to define India’s slowdown
An analysis of indicators that make up India's GDP reveals the extent to which the economy has slowed downHow does one explain the fact that home loans are growing and so is the number of unsold homes? It may be that people are buying homes from investors, not builders
PremiumThe rain has stopped. You step out of home to run a few errands. On the way, you find ₹500 note lying on the ground. You pick it up and put it in your trouser pocket, thinking you’ll donate it to the local charity. But you give in to temptation as soon as you cross the local book shop and buy the latest bestseller for ₹500. The bookseller is an alcoholic and uses the money to buy his stock of alcohol for the day. The liquor shop owner takes the ₹500 and walks across to the local cinema and buys the ticket for the latest movie, featuring his favourite heroine. He also buys some atrociously priced popcorn and a soft drink. The cinema owner has to go attend a wedding at the other end of the town and he gives that very ₹500 note to a taxi driver, given that his driver is on leave.
What’s happened here? The movement of the initial ₹500 has made everyone better off. The initial ₹500 has been spent four times and has generated ₹2,000 worth of economic activity. In that sense, the first ₹500 contributed ₹2,000 to the Indian gross domestic product (GDP). The same wouldn’t have happened if you had taken the ₹500 and deposited it in the bank or simply kept it in your pocket.
GDP, in the conventional sense of the term, is defined as the “measure of all the goods and services produced inside a country". Nevertheless, as John Lanchester writes in How to Speak Money: “GDP can be thought of as a measure not so much of size… It measures the movement of money through and around the economy; it measures activity." The example shared above (which is inspired from a similar example in Lanchester’s book) shows precisely how economic activity adds to the GDP. One man’s spending is after all another man’s income, and the income can be spent again. So, the cycle is supposed to work and add to the economic activity and the GDP.
It is this activity that has been slowing down in India, since the beginning of 2019. The GDP growth during January to March 2019 slowed down to 5.8%. Looking at economic activity in the period April to June 2019, it is safe to say that the GDP growth would have slowed down further during the period.
The GDP of an economy is the sum of private consumption expenditure, investment, government expenditure and net exports (exports minus imports). There are many high-frequency economic indicators which tell us about the state of each of these four inputs that form the GDP. Let’s look at a series of 15 economic indicators to see how the economic activity during the period April to June 2019 has slowed down.
The consumption matrix
Consumption is the most important part of the Indian economy, given that it forms around three-fifths of the Indian economy. And any slowdown here is bound to affect the overall economy. Except for perhaps retail loans given by banks, there is a contraction in all other parameters which measure consumption in different ways.
Domestic car sales: During April to June 2019, car sales fell by 23.3% in comparison to the same period in 2018. This is the biggest contraction in quarterly sales since 2004 (that’s how far back the quarterly data in the Centre for Monitoring Indian Economy database goes). A slowdown in car sales negatively impacts everyone from tyre manufacturers to steel manufacturers to steering manufacturers etc., when it comes to the backward linkages that car manufacturers have. As far as forward linkages are concerned, many auto dealerships are shutting down or shrinking. At the same time, the vehicle loans growth has slowed down to 5.1%, the slowest it has been in five years.
Two-wheeler sales: These have not been as badly hit as car sales. Between April and June 2019, two-wheeler sales contracted by 11.7%. This is the biggest fall since October to December 2008, when two-wheeler sales had contracted by 14.8%, in the aftermath of the start of the financial crisis. In fact, even mopeds are not selling, with their sales down 19.9% between April and June 2019 (In 2018-2019, a total of 880,000 mopeds were sold, suggesting there is still good demand for them).
Tractor sales: A good indicator of rural demand, tractor sales during April to June 2019, fell by 14.1%, the highest fall in nearly four years.
Housing sales: As per Liases Foras, a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of 7% from March 2018, when the number was at 1.2 million. This means that builders are building new houses at a faster pace than people are buying them. The real estate sector has forward and backward linkages with 250 ancillary industries. So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too. This is something which isn’t happening currently. The fact that real estate prices haven’t gone up in years makes people feel less wealthy and as a result spend less.
Bank retail loans: This data point goes against the trend. During April to June 2019, the retail loans of banks grew by 16.6% in comparison to the same period last year. During the same period last year, they had grown by 17.9%. There has been a marginal fall in growth. Housing loans form more than half of the retail loans—they grew by 18.9% during the quarter against 15.8% last year.
How does one explain the fact that housing loans are growing and so is the number of unsold homes? A possible explanation for the fact is that people are now buying homes from investors who had bought many homes between 2003 and 2012, instead of buying directly from a builder. To that extent these are not new homes and hence, cannot create the kind of economic activity that the building of a new home can.
Other than home loans, credit card outstanding grew by 27.6% between April and June 2019, against 31.3% in April to June 2018. Again, a marginal fall at best. This also explains, why every time you tell someone there is a slowdown, they reply, but the malls and restaurants are packed. Credit cards are used by a certain section of the population and at least, when it comes to them, they haven’t slowed down on spending on small ticket items.
Also watch: Key indicators that suggest we are well into an economic slowdown
FMCG companies: The volume growth or the number packs sold, of fast-moving consumer goods (FMCG) companies has slowed down over the last one year. If we look at Hindustan Unilever Ltd, the volume growth between April and June 2019 was at 5%. It was 12% during the same period last year. There are other examples as well. Dabur India posted a volume growth of 6% during April and June 2019, against 21% last year. Britannia was down to 6% against 13% last year. Indeed, this is worrying, given that people seem to be going slow on making everyday purchases.
Non-oil non-gold non-silver imports: This is a good indicator of consumer demand as it indicates when people buy more imported goods. During April to June 2019, these imports fell by 5.3%, the biggest contraction in three years. They had risen by 6.3% during the same period last year.
Investment insight:
Fresh investments are very important for the GDP of any economy to keep growing, for the simple reason that they create new jobs, which in turn leads to higher incomes and higher spending, creating economic growth. Unfortunately, things are not looking good on the investment front. Consider:
Domestic commercial vehicle sales: This is seen as an economic indicator of industrial activity. Faster sales indicate a robust activity on the infrastructure and industrial front. Commercial vehicles are used to move around finished as well as semi-finished goods. Sales of these vehicles during April to June 2019 fell by 9.5%, the highest contraction in five years, telling us that all is not well on the investment front. Between April to June 2018, sales had gone up by 51.6%.
Bank lending to industry: This crucial indicator had remained almost flat for a couple of years, and it has improved in the recent past. For April to June 2019, it went up by 6.5% against 0.9% between April to June 2018. This was largely on account of lending to large industries, which grew by 7.6%, against 0.8% last year. When it comes to lending to micro and small industries, the growth was almost flat at 0.6% against 0.7% last year. While lending to big industry is important, it is the micro and small industries which tend to create the bulk of any jobs in any economy, as they grow bigger.
Revenue-earning rail freight: The bulk of the freight operations of Indian Railways is concentrated around moving certain commodities like coal, pig iron, cement, petroleum, fertilizers, iron ore etc. If the Railways is moving more of these commodities around the length and breadth of this country, it’s a good indicator of investment and industrial activity picking up. How do things look on this front? This indicator grew by 2.7% between April and June 2019, the slowest in nearly two and a half years. It had grown by 6.4% between April and June 2018.
Final consumption of finished steel: Creation of any new physical infrastructure requires steel. Hence, a faster increase in steel consumption than in the past shows increased investment activity than in the past. The consumption of finished steel grew by 6.6% between April and June 2019, in comparison to the same period during the last year, when it had grown by 8.8%. This was the slowest in two years.
New investment projects announced: The value of new projects announced during April to June 2019 fell by 79.5% year on year. This is the highest fall since September 2004. In absolute terms, the value of new investment projects announced during April to June 2019 stood at ₹71,337 crore, the lowest since September 2004. This is a great indicator of the fact that businesses really do not have faith in the economic future of India, irrespective of what they say in the public domain.
Investment projects completed: The investment projects completed fell by 48% in comparison to the last year. This is the highest fall since September 2004. In absolute terms, the value of the projects completed during the quarter stood at ₹69,494 crore, the lowest in nearly five years.
Expenditure and net exports
Government expenditure tends to form around 10-11% of the Indian economy (in current terms, without adjusting for inflation). In the last two fiscal years, the growth in government expenditure was at 19.1% and 13.2%, the highest since the financial crisis years of 2008-09 and 2009-10 and was instrumental in driving economic growth to some extent. How do things look in 2019-20? To drive economic growth, the government needs to spend more and for that the tax growth is important. During April to June 2019, the gross tax revenue of the central government went up by just 1.4% to ₹4 lakh crore. During the same period last year, the gross tax revenue had jumped by 22.1%.
What this tells us very clearly is that the government is clearly feeling the heat of the economic slowdown. In this scenario, whether it will have the ability to increase its spending like it did over the last two years, is a question well worth asking.
Finally, net exports: This figure for April to June 2019 stood at -$46 billion. This was almost similar to the net exports for April to June 2018 at -$46.6 billion. This is primarily because both exports and imports during the period were at almost similar levels as last year. Given this, there hasn’t been any increased economic activity on the exports front either.
Almost all these economic indicators suggest that we are well into an economic slowdown, and it can possibly get worse from here. The irony is that this slowdown seems to be obvious to everyone except the government. The question this leaves us with is, how do you solve a problem without acknowledging it first?
Vivek Kaul is an economist and the author of the Easy Money trilogy
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