Reckoning with a Slowdown and Still High Inflation

There are several recent data points emerging from government and other sources, that are pointing to an economy slowdown. Whether this is a cyclical slowdown or not, only time will tell. Whether this is a pattern which is aligned with the global economy slowdown, we will examine. And if this is cyclical i.e. temporary, then it is supposed to pick up six months later. But then an economy slowing down, even if cyclically, during the festival season is a worrying feature. In the last quarter of the calendar year, due to festive cheer and consumer spending, the economy usually gets a boost from consumer cheer and optimism. That seems to be missing.

First the data points. These are from industrial production, exports, tax collection especially Goods and Services Tax (GST). All these are from the government. Then there is the data and assessment from the Reserve Bank of India, which recently concluded its monetary policy meeting, and decided not to cut interest rates. The RBI conducts a sentiment survey and reports it every quarter, and this survey gives an indication of the future trajectory of the economy. Finally, there is data from private sources such as the Purchase Managers’ Index (PMI) or quarterly results of companies which report their earnings, profits and growth.

The index of industrial production (IIP) went down in August. The growth rate was going down for three months in a row. The August number (negative 0.1) is the lowest in nearly two years. While IIP is known to be volatile and subject to post facto changes and adjustments, the trend is clearly showing a slowdown, especially in manufacturing. Mining activity was negatively impacted by unseasonal rains, but manufacturing slowdown is to be noted. The sale of automobiles, one of the important drivers and indicators of manufacturing growth, fell by 19 percent in September, just as the festival season got started. Related to this is the two-month strike at the Tamil Nadu factory of Samsung Electronics.

This factory accounts for nearly 20,000 crore of Samsung’s sales revenue in India, and is a crucial example of attracting foreign investors into India.  This month the Managing Director of Swedish Volvo Group in India too cautioned that the country’s manufacturing sector has to rev up substantially to drive sustainable and high GDP growth. The share of manufacturing is stuck at around 16 percent of GDP and has not moved much despite strong initiatives such as Make in India.

The shift away from China, or at least diversifying away from China for many Western companies, was supposed to lure them to India. But that has not happened yet in a big way. India’s big plans on setting up a semiconductors complex, as also initiatives for green hydrogen and electric vehicles are long on ambition, but short of actual progress on the ground. Another aspect which is crucial to the growth of the manufacturing sector is the shortage of skills.

Earlier this year the Taiwanese Minister for Foreign Affairs had cautioned India about addressing the shortage of skilled engineers if it wants to attract investments in chip making and semiconductors manufacturing.  Taiwan is keen to help India in electronics manufacturing but other hurdles such as infrastructure and high import tariffs have to be overcome.  The irony in India is that while there is a shortage of skills required for manufacturing, nearly 30 percent of college graduates in the 25 to 30 age group are unemployed. This means that college education is not making them industry ready or employable.

This is a dire comment on the state of education curricula and role of academic institutions in getting the youth ready for work.  This is felt in a variety of sectors including auto, auto ancillaries, textiles and mining.

The other data pointing to weakness is the fall in merchandise exports in August to 34.7 billion dollars, leading to a widening of the trade deficit. The rupee dollar rate also dropped below 84 causing concerns about the deficit and inflation.  The Purchasing Managers’ Index was at an eight-month low at 56.5 in September, down from 57.5 in August. This is an indicator of the bullishness of factory managers of future outlook.

The trend in collections in GST also points to a slowing economy. The collection in September at 1.73 lakh crore was lower than in August which was 1.75 lakh crore. The September collection was barely 6.5 percent higher than last year. Net of refunds the total collection for September was 1.53 lakh crore, barely 3.9 percent higher than one year ago. Since GST is a transaction tax, it keeps pace with the growth of nominal GDP, which is growing at around 10 percent or higher (due to inflation and volume growth).

If GST is growing slower than nominal GDP surely that is a sign of worry. To add to this worry, is the news that the GST council may consider a hike in GST rates, to make up the shortfall that may arise, if the compensation cess is removed. The cess has been imposed all these years to pay to the State governments to compensate for their estimated loss due to surrender of right to impose State sales tax.

Thus, there are indicators from various quarters of an economy slowing down. Even manufacturing employment went down from 12 to 11 percent of the workforce, and employment in the agriculture sector has gone up from 43 percent in 2018-19 to 46 percent now, an increase of 6.8 crore workers. But workers going back to agriculture and rural areas means they are going to lower wages and lower productivity jobs as compared to manufacturing and services. This might mean lower purchasing power and hence lower consumer spending. We need to sharply increase manufacturing employment, for an increase in consumer spending as well as in household incomes.

It is still true that India’s economy is growing faster than most other large economies, including China. But keep in mind that the USA growing at 3 percent is like India growing at 30 percent, since the former is ten times bigger. And the USA is not experiencing a slowdown yet. So, India’s slowdown cannot be attributed to a global phenomenon. Besides we also need to worry about the impact of the wars in Ukraine and the Middle East, and of rising oil prices, and of inflation too. Even the RBI which should have decreased interest rates to spur economic growth, chose not to, because of the worry about inflation. The next six months look like a challenging period for the economy as it navigates between the twin challenges of a slowing economy and still high inflation.

(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press)