Why low demand means bad news for the economy

  • The Indian economy may be heading for a slowdown, according to the worrying numbers posted by automobile and fast moving consumer goods companies
  • Manufacturing and services benchmarks are also sending out a similar warning

Is there reason to fear a slowdown?

Considering the recent numbers reported by companies in India across several sectors, a slowdown this fiscal is a threat. Maruti Suzuki, India’s largest automobile company, has reported 18.7% weaker domestic sales in April than those a year ago. Hindustan Unilever and Dabur India have reported single-digit volume growth year-on-year in the March quarter. The aviation sector in India has also been struggling. Growth in air passenger traffic fell for four straight months till March. In a sign of weakness in the farm sector, domestic sales of Escorts’ tractors were down 18.2% to 4,986 units from those a year ago.

What are the possible reasons?

One reason is the dearth of jobs, along with job insecurity and meagre wage hikes. Note ban is also a big factor. That exercise saw a lot of money being invested in real estate and gold. Many non-banking financial companies (NBFCs) borrowed heavily when the system was flush with cash. As those construction and infrastructure projects that these NBFCs lent to got stuck for various reasons, the developers could not pay them. NBFCs, in turn, could not repay the banks and mutual funds. These NBFCs are unable to lend now. This is hurting consumers, who are already worried because of job insecurity.

Are there structural reasons, too?

The reasons are more than structural. There is insecurity among people as jobs are no longer permanent. They are thus not sure where they would live next. Flat incomes are also a worry.

How do consumers respond?

Consumption patterns change. People reduce consumption of goods other than essentials. More sachets and smaller packets are bought. Some families may opt for “cord cutting", which means a reduction or doing away with DTH and cable connections. People eat out less. Low-cost houses gain demand. Families that had earlier wanted to buy three-bedroom homes settle for two-bedroom options. People fly less and use trains. All this can hurt companies, leading to job losses as factories need fewer workers to run them.

Is there another devil around?

A lot depends on the monsoon and the new government’s policies. The Met department has predicted near normal rains, while private forecaster Skymet expects a below normal monsoon. If Skymet is correct, farm incomes would be further stressed, adding to the agrarian crisis. Incomes of consumer goods firms would be adversely affected. Inflation could rise and so could government borrowing, further crowding out private investment. Much depends on how the new government tackles the crisis affecting NBFCs.