SK Jain has seen many economic ups and downs in the decades he has been running his car parts company in a satellite city on the outskirts of the Indian capital, New Delhi. But these are exceptionally bad times, he says.
“In the past things would move by hook or by crook, but nothing is moving at all now,” Jain told Al Jazeera. “We’ve been in this business for 30 years and I’ve never seen it this bad.”
Once the world’s fastest-growing major economy, growth in India has skidded in recent months, creating a serious challenge for the government as it gets ready to present its annual economic report and its budget for the financial year starting April.
For the three months ending September, the country’s economy grew by 4.5 percent, according to the latest official data. That was its slowest pace in more than five years, and significantly slower than the 7 percent clip it clocked up in the same period a year earlier.
The main reason for the slowdown was a drop in private investment and consumption.
Part of the blame for the deceleration lies in factors beyond the government’s control, including a global slowdown brought about by a trade war between the United States and China and tensions in the Middle East that have driven India’s imported energy bill higher.
But it has also been exacerbated by some poorly calculated economic reforms that could have been avoided.
And the outlook for people like Jain and others in India appears to be gloomy.
The government recently projected economic growth of 5 percent for the current financial year, down from 6.8 percent last year, which would make it the slowest pace in 11 years.
Without the economy growing at a healthy clip, everything – from government revenues to individual incomes – is being adversely affected, analysts say.
‘Demand has collapsed’
“What we are witnessing now is a new phenomenon,” Sunil Sinha, principal economist at India Ratings, a Fitch unit, told Al Jazeera. “Demand has collapsed. We’ve never had this before. Under such situations, policy-making is tricky,” he said, as the government has few resources to boost the economy. “Its options are very limited,” he added.
The slowdown can be traced back to controversial flagship reforms by Prime Minister Narendra Modi’sgovernment implemented in the past few years.
These included a sudden clampdown in November 2016 on more than 80 percent of the currency in circulation in a bid to crack down on illegal activities. That was followed by a significant sales tax overhaul the following summer that created confusion and compliance burdens for many small companies, leading to a drop in business activity.
This, along with a government decision to not increase the minimum price it pays farmers for their produce, hit incomes in both urban and rural areas, curbing the spending power of many people.
In a November 14 note, Anthony Nafte, senior economist at Hong Kong-based capital markets and investment group CLSA, warned that the Indian economy was now in a form of “recession”, the kind in which banks prioritise protecting their capital bases rather than making new loans.
Meanwhile, companies and households are prioritising the repayment of loans rather than taking out new borrowings for investment and expansion, he said.
Government data released in December shows that 18 out of the 23 industry groups in the manufacturing sector experienced negative growth during the month of October 2019 as compared with the same period last year. Of those, 10 saw a double-digit dip and the electricity sector saw a record contraction of 12.2 percent, the third consecutive month it had shrunk.
During a debate in parliament in December, Finance Minister Nirmala Sitharaman acknowledged that there was a slowdown but said there was no recession.
“Growth may have come down, but it’s not recession yet or it won’t be recession ever,” she said.
India Ratings’ Sinha said what the government needs to do to revive the economy is a “no brainer”.
At the top of his wish list is for the government to push money into infrastructure, especially in rural regions, as doing so will create jobs for those most in need, who will, in turn, help drive sales of everything from tea and biscuits to soap and toothpaste. The problem, however, he points out, is that because of the economic slowdown, “where will you get the money to fund that?”
The bigger problem with the slowdown, warns Madan Sabnavis, chief economist at CARE Ratings, is that “no one knows what’s the solution. We’ve entered this trough. Economies don’t recover that fast.”
Letting go of the purse strings
Modi’s government has taken several steps, including cutting corporate taxes, implementing a bailout package for the cash-strapped housing sector, promises to speed up infrastructure spending, rolling back newly introduced taxes on foreign investors, and schemes to hand cash to farmers to boost investments and encourage spending.