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Is India Heading Towards Economic Recession?

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Is India Heading Towards Economic Recession?
Abhishek Raja “Ram” - 28 September 2019

Economic recession is a period when economic performance declines significantly. Recession is typically recognised after two to three consecutive quarters of economic decline. An economic slowdown is merely a decline in the growth rate of the GDP. In case of the latter, the pace of economic growth is reduced.

During this year’s Union Budget, the Finance Minister has set a target of 7 per cent GDP increase rate and targeting $5 trillion economy in the next five years. On the other hand we have been hearing that India could head towards Economic Recession from here!

Let’s check various assumptions and current performance or underperformance of various sectors and try to figure out whether it’s a case of economic slowdown or recession?

India is currently facing economic slowdown

There is no doubt that India is currently facing economic slowdown. This can be substantiated through various data analysis. Recently Index of Eight Core Industries was issued by the Government. The combined Index of Industrial Production (IIP) of Eight Core Industries stood at 131.4 in June’2019, which was merely 0.2 per cent higher as compared to the index of June’2018.

Growth of Eight Core Industries for Apr-Jun’19 vs Apr-Jun’18 is as follows:

Sector

Growth/ (-) Decline

Crude Oil production

(-) 6.80

The Natural Gas production

(-) 2.10

Petroleum Refinery production

(-) 9.30

Cement production

(-) 1.50

Fertilizers production

1.50

Coal production

3.20

Steel production

6.90

Electricity generation

7.30

Now the basic vital question after analysing this data is, whether the ongoing slowdown is structural or cyclical? But why do we need to understand whether it's structural or cyclical? We need to understand this basic because the method to tackle or handle structural slowdown is different from cyclical slowdown. To overpower structural slowdown economic reforms are required whereas in case we are having cyclical slowdown a stimulus package is needed.

Auto sector blues is an indication

Automobile Sector is in negative growth. July sales of vehicles fell the most in 19 years across categories, at 18.7% on-year, as per data released by the Society of Indian Automobile Manufacturers. In the passenger vehicle segment, the fall was almost 31 per cent. There has been news of lakh of people losing jobs or about to lose jobs in this sector!! But what’s the truth?

Let's try to read between the lines. At Mahindra, the country’s largest maker of utility vehicles and tractors, entry-level campus hiring will be reduced to about half. “As against around 400 we used to hire, we will take just about 200 this year,” said chief people officer Rajeshwar Tripathi. The approach now is to minimise fresh hiring and enhance productivity, he said. Tata Motors, on the other hand, have almost stopped external hiring, including campus hiring, and have been encouraging internal job rotations to fill open positions. Rotation of experiences and skill-building are some of the key focus areas in auto companies.

In addition, there is an opportunity for relooking at productivity norms and plant layouts. automakers have slashed production which has affected about 3,50,000 jobs across vehicle manufacturing, components and distribution segments in the past three months. The affected employees include about 2,30,000 at dealers, 100,000 in the auto component industry and another 15,000 casual and temporary workers. Around 3,000 temporary workers have lost jobs with Maruti Suzuki as admitted by Chairman RC Bhargava. These were temporary workers whose contract were not renewed due to the slowdown. This data is for Tier I companies and if we add numbers of Tier II and III companies then the number could go to 1 million!!

Issues in telecom sector

After the entry of Reliance Jio, the telecom sector has shook up the entire Indian Telecom market. With its offering of almost free data, every telecom company is bleeding! Private Sector players already have huge debts and losses and might not be able to service their interest part or repay their loan in the long term. Whereas Government sector players like BSNL & MTNL are also suffering from losses. They are even not able to pay salaries to their staff regularly. MTNL’s standalone loss for Mar’19 quarter was Rs. 755.51 crore. BSNL reported a loss of Rs. 8000 crore for FY 2018. Government players don’t have debt liability on them and own precious land’s but their operating profits have issues. Thus, in the long term, they will not be able to sustain continuous pressure of performance and competition with the current huge workforce and might fail!

Real estate and infrastructure sector

The Real estate sector is in negative territory since 2008 debacle of US Prime loans crisis. After the introduction of RERA, it was thought that it will help in re-writing fortunes of the sector but alas it was not sufficient to revive the sector per se. It has been said that more than 12 lakh unsold units are lying with the builders which has made this sector cash deficit. Thus more number of builders are becoming bankrupt and this will impact every sector of the economy.

Impact on sectors like banking, steel and cement

Banks and Financial Institutions are the worst sufferers of this slowdown. If this continues further their NPA will increase and it will create double problem for them. Their profitability is already under stress and with such increase they will face a crisis like never before. Cement Sector has already shown as a negative growth of 2% - 6% for Apr-Jun’19 quarter in comparison for Apr-Jun’18. Further slowdown in Real Estate sector will break this sector who is already under pressure for performance & profitability. Any slowdown in Real Estate or Automobile sector will create next level trouble for Steel sector. Steel sector doesn’t have such buffer to handle slowdown in both Real Estate and Automobile sector.

Unemployment and pink slips

In India Unemployment current percentage is highest in many decades. Also as discussed above many sectors have started reducing employees thus many jobs have already been lost. Losing a job comes as a big loss for the economy as this changes mentality forever and a person moves towards a reduction of expenditure and might also lead to loan defaults. Thus, job loss reduces the chances of revival of economy.

Thus, we can safely conclude that there is Economic Slowdown in India! But whether it will lead to economic recession or not depends on the response of the RBI and the Central Government. If they accept that there is a slowdown and act accordingly we might not face recession but if they don’t accept slowdown or takes much time for action then we are surely going to face recession!! So the ball is in the court of Government. They should respond ASAP to help industries fighting with the economic slowdown.

The author is Founder and Promoter, GST Panacea

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