A comparison of key economic indicators shows that the slowdown in India has only worsened in the last couple of months, and now appears well and truly in place (Jayachandran/Mint)
A comparison of key economic indicators shows that the slowdown in India has only worsened in the last couple of months, and now appears well and truly in place (Jayachandran/Mint)

Why the slowdown is in the mind

  • An analysis of India’s GDP reveals that low consumer and business confidence is fuelling the slowdown
  • The psychology of the slowdown is clearly at work. Other than bank retail loans, the overall private consumption remains weak

MUMBAI : In a piece published in this newspaper about three months ago, I had looked at how 15 economic indicators were suggesting an economic slowdown, taking into account data from April to June 2019. Three months later, we now have data for July to September 2019. This new data suggests that the economic slowdown has only worsened. A major reason for this is that the psychology of the economic slowdown is now stronger than it was earlier.

In order to understand this, let’s consider what happened during the Great Depression which started in 1929. Over the next four years, GDP per person (per capita income) went down by 20%. The impact of this fall in per-capita income on private consumption was huge. As Nobel Prize winning economist Robert J. Shiller writes in Narrative Economics: “Sales of new cars by Ford Motor Company… fell 86% from 1929 to 1932." This fall in sales leads Shiller to ask: “Why was the feedback loop so severe?"

The answer lay in the mind of consumers. According to Shiller, “Those who already owned a car decided to keep the car going rather longer. Those who did not own a car, decided to continue taking public transportation." For those who lost their jobs, it obviously made sense to postpone purchasing a car. Even those who were not impacted by the Great Depression postponed their car purchases (and purchases of other thing as well) given that they had a huge fear of losing their jobs.

This feedback loop hurt economic activity and destroyed more jobs in the process.

As Shiller writes: “Some people postponed buying a car or other major consumer items, which led to loss of jobs in the auto and consumer-products industries, which led to more postponement, which led to a second round of jobs loss."

All this impacted consumer confidence and business confidence of that era. If the consumer confidence is high, the consumer will spend, the businesses will invest and the government will earn higher taxes, which it can spend on its programmes. Nobody understands this better than the politicians of the day.

Calvin Coolidge, who was the President of the United States between 1923 and 1929, took it upon himself to reassure the American public that all was well. Public officials, businessmen and journalists indulged in the game as well. All this worked for a while, until the public started to see through the manufactured optimism and the Great Depression was well and truly in place.

If all this sounds familiar, that’s because parts of this playbook are relevant in India today. Of course, India is nowhere near a depression or even a recession. The economy is going through a slowdown in economic growth. But the feedback loop is in place—and Indian politicians and policymakers have also tried to talk up the economy.

Is all this working? Economists have talked about the possibility of green shoots of recovery in the second half of this financial year. However, looking at the data for July to September 2019, for now the slowdown is well and truly in place.

The GDP of an economy, a measure of its economic size, 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. Let’s take a look.

Why are housing loans growing fast, given that there are over 1.3 million unsold homes all across India? One explanation is that locked up homes are being sold
Why are housing loans growing fast, given that there are over 1.3 million unsold homes all across India? One explanation is that locked up homes are being sold

The Consumption Matrix

The psychology of the economic slowdown is clearly at work here. As per the Reserve Bank of India, the consumer confidence in September 2019 was at a six-year low. This is clearly reflected in the economic indicators. Other than bank retail loans, the overall private consumption remains weak.

Domestic car sales: This is one indicator where most attempts at talking up the economy have been made. One example is that of car company MG Motors which has had good sales in its initial few months of operation in India. The question one often hears is: if there is a slowdown, how come people are buying the MG Motors’ cars? Well, the numbers involved here are very small—a few thousand units or so it will not make an impact. During July to September 2019, car sales fell by by 355,000 or 37.3% in comparison to the same period in 2018. This is the worst fall since October to December 2004 (the period until which Centre for Monitoring Indian Economy provides this data). The fall between April and June had been 23.2%.

To be sure, the month of October seems to have bought some cheer to car sales, with the Diwali and Dusshera falling during the month. The data period October to December 2019, will give us a better idea on this front.

Two-wheeler sales: Sales crashed by 20.5% during July to September 2019. This is the biggest fall since December 2004. The fall between April and June had been 11.7%. Interestingly, moped sales crashed by 30.8% during July to September 2019. A significant number of mopeds are still sold in India. In 2018-19, more than 880,000 mopeds were sold. This tells us that there is a problem in consumption across the income spectrum and it’s not just about millennials preferring Uber and Ola.

Tractor sales: A good indicator of how economically confident the rural rich are fell by 9.9% year on year during July to September 2019. It had fallen by 14.1% during April to June 2019.

Housing sales: As per Liases Foras, a real estate research firm, the number of unsold homes in the country is over 1.3 million. The worth of these homes has been put at 9.4 trillion. In March 2019, the number of unsold homes had stood at 1.27 million, which was a jump of 7.2% from March 2018, when the number was at 1.190 million. On the whole, people are still not buying homes as fast as builders are building them. This is primarily because no buyer wants to buy an under-construction property.

Bank retail loans: Here the growth during July to September 2019 (16.6%) is exactly same as the April to June quarter. A major reason for this fast growth lies in the fast growth of housing loans, which grew by 19.3% during July to September, against 18.9% in April to June. What is the explanation for this, given the fact that there are over 1.3 million unsold homes all across India? Between 2003 and 2012, investors went overboard while buying real estate. All these homes which have been locked up for years are now being sold. This is one possible explanation. Of course, locked up homes being sold do not directly add to economic activity.

FMCG companies: Volume growth basically refers to growth in the number packs sold by FMCG companies. For Hindustan Unilever Ltd, this stood at 5% during July to September 2019 as it had between April to June 2019. The volume growth during July to September 2018 had stood at 10%. Clearly, the growth of everyday purchases has slowed down over the last one year.

Non-oil non-gold non-silver imports: This is another good indicator of consumer demand, given that a lot of stuff that people buy these days tends to be imported. This indicator fell 7.4% year on year during July to September 2019 against a 2.4% fall during April to June 2019.

Passenger traffic on Indian Railways: This economic indicator wasn’t there in our previous analysis. The total number of passengers carried by the Indian Railways fell by 2.1% year-on-year, during the period July to September 2019. It had fallen by 0.6% during April to June 2019.

Domestic passengers handled by airports: This is another new economic indicator introduced into the analysis. It grew in double digits between mid 2014 and end of 2018. Between July to September 2019 it grew by 1.5%, after contracting by 0.7% between April and June 2019.

Investment insight

Businesses invest and expand when they are confident of earning a reasonable rate of return on their investment, which is more than their cost of capital. At the same time, they look to expand when their capacities are being more or less fully utilized and they can see good consumer demand for what they produce. Let’s take a look at how things are looking on the investment front.

Domestic commercial vehicles sales: Faster sales indicate robust activity on the infrastructure and industrial front. Between July and September 2019 domestic commercial vehicles sales crashed by 35%. This is the biggest fall since January and March 2008. Sales had fallen by 9.5% during April to June.

Bank lending to industry: This indicator has been growing constantly since the beginning of 2018. In April to June 2019, bank lending to industry grew by a robust 6.5%. The growth fell to 2.7% during July to September 2019, again showing slowdown in industrial activity.

Revenue earning rail freight: This crucial indicator contracted by 3.7% during July to September 2019 compared to the year-ago period, after having grown by 2.7% during April to June 2019. This is the biggest contraction since December 2004.

The Indian Railways moved commodities like coal, pig iron, cement, petroleum, iron ore, etc., around the country. The more commodities it moves, the better the industrial activity is. The contraction clearly tells us otherwise.

Final consumption of finished steel: The building of any physical infrastructure requires steel. Given this, if the consumption of steel is growing at a robust rate, it indicates strong industrial and infrastructure activity. The year-on- year growth in the consumption of steel during July to September 2019 fell to 3.1%, against 6.1% during April to June.

New investment projects announced: The value of new investment projects announced between July to September 2019 fell by 51.8%. While this fall is huge, it’s better than the 77.3% year on year fall during April to June.

In absolute terms, the value of the investment projects announced fell to 1,11,394 crore. This is second-lowest in a period of nearly fifteen years (without even taking inflation into account). The lowest was 86,901 crore during the period April to June 2019. Even though there has been some improvement on this front, it tells us very clearly that business confidence has gone missing.

Investment projects completed: The value of the investment projects completed during July to September 2019 stood at 64,132 crore. This is the lowest since July to September 2009, when it was at 63,453 crore.

The value of investment projects completed during July to September 2019 fell by 39% year-on-year. It had fallen by 44.9% between April to June 2019. Clearly, things continue to look bleak on the investment front.

Government expenditure: The growth in the gross tax revenue during the first six months of 2019-20 has been at a meagre 1.5%. It needs to grow at 18.3%, if the total expenditure that the government has targeted during this fiscal has to be met. The gross tax revenue growth during July to September stood at 1.6% against 1.4% between April and June.

There has been an improvement of 20 bps, but the collections are nowhere near the target. This is not surprising given that strong tax collections are a function of strong economic activity.

Finally, net exports: The indicator on the exports front fell by 3.7% during July to September 2019. This is against a fall of 1.3% during April to June 2019.

Clearly, the situation during July to September 2019 has only worsened in comparison to April to June 2019. The stock market might be doing well thanks to a few selected stocks rallying, but that hasn’t been able to lift the mood across the economy.

All in all, the psychology of the economic slowdown has well and truly set in.

Vivek Kaul is an economist and the author of the Easy Money trilogy.


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