In Economics: An economy slowdown is a situation in which GDP growth slows but does not decline.Countries usually measure economic growth in terms of gross domestic product (GDP), which is the total value of goods and services produced in an economy during a specific period of time. For example, if GDP goes from 5% growth to 3% growth, an economy is experiencing a slowdown.
Difference between Economic Slowdown and Recession
An economic recession signifies a drop in the gross domestic product (GDP), while a slowdown is merely a decline in the growth rate of the GDP. In recession when this value falls, the country’s economy is said to be in recession. It means that the country is producing and earning less than what it did earlier. An economic recession is marked by low consumer spending because people lose confidence in the growth of the economy. This decrease in the demand for goods and services, in turn, leads to a decrease in production as companies reduce the output to match the demand. This also leads to lay-offs and a rise in unemployment.
However, a one-off decline in the GDP does not mean that the economy has slipped into recession. The GDP must decline for two consecutive quarters for it to be called recession.
A slowdown, on the other hand, means that the pace of the GDP growth has decreased. It means the production and earnings of these economies are not growing at the same pace
Indian Economy slowdown:
Causes for the present slowdown in the Indian Economy:
· Effect of Demonetisation
· Too much debt
· Rollout of GST
· Global Slowdown
· Trade War Between USA & China
· Currency Depreciation
· Corona Virus Effect
Major Sector Impacted
Auto Sector: India is witnessing the worst kind of slowdown in its automobile industry amidst slowing economic growth and increasing cost of vehicle ownership. Given its strong backward and forward linkages with other industries and services, slump in the sales of cars and bikes will pull down many upstream and downstream industries and services including parts and components, steel, tyre and retailing, among others.That will deepen the economic crisis with the country’s GDP growth already down to 5% in April-June 2019 quarter. No wonder, there is a growing clamor for tax cuts and other stimulus measures.
An industry neutral booster of lower corporate tax, announced last week by finance minister Nirmala Sitaraman, will improve the ability of corporates to invest. However, high GST and cess will continue to put the automobile industry at a disadvantage. Moreover, the package doesn’t address the problem of demand deficiency that calls for deeper cuts in GST that will make bikes and cars cheaper, and possibly personal income tax cuts that improve buyers’ ability to buy.
India’s automobile industry accounts for 49% of the country’s manufacturing GDP, and it directly and indirectly employs 37 million workers. According to the Society of Indian Automobile Manufacturers (SIAM), 3,50,000 jobs (mostly contractual) have been lost and over a million are at a risk due to plant shutdowns and bankruptcy of dealers and component makers.
The sales of passenger vehicles fell for the tenth straight month in August by a whopping 31.57% over the same month last year. The slump in automobile sales is quite pervasive globally. However, India has local factors to add to its woes. Among them, bad regulations top the chart. Indian government has provided protection to the automobile industry from imports and helped expand it substantially, but it has started to squeeze it for meeting tax-expenditure gap. The auto sector contributes roughly 15% to GST collection. It attracts the highest GST slab of 28% and the imposition of additional cess pushes the effective taxation to a whopping 50%. India’s excessive steel protectionism is artificially jacking up input cost for this steel intensive industry.
Further, the upward revision in road and registration charges by state governments are making vehicle ownership unaffordable as rightly highlighted by the Maruti chairman. If that was not enough the decision to not buy Iranian oil and supply disruption in Saudi Arabia following the attack on Aramco facilities, will push up fuel prices and play spoilsport for the automobile industry.
With government reducing GST on electrical vehicles to 5% while leaving those on conventional vehicles untouched, the relative tax gap between the two categories goes up. That will further reduce the relative attractiveness of diesel and petrol vehicles and add to misery of their manufacturers. That will cost thousands of jobs. That is not all. The rush to adopt emission standard BS-VI from BS-IV is making things difficult. As only BS-VI compliant vehicles will be allowed to register from April 1 next year, prospective buyers want to wait till the very end for hefty discounts on BS-IV vehicles or better buy BS-VI as resale value of BS-IV vehicles is likely to take a hit once new emission norms are enforced. Besides, the adoption of BS-VI – needed to reduce air pollution – will increase the cost of vehicles and further depress demand.
Rapid expansion of metro trains further reduces the demand for cars. Even those who want a car can easily go for Ola or Uber, amidst the ever-increasing hustle of navigating traffic and shortage of parking space. To add to that, insurance premiums have gone up substantially. Moreover, the liquidity crunch in the shadow banking space has dragged down demand and will continue.
The near crash in prices of most agricultural commodities (aggravated by demonetization and resultant cash crunch) has inflicted serious damage on the rural economy, from which it has not yet recovered. That is adversely affecting the demand for two wheelers, tractors and entry level cars. To make matters worse, one can’t foresee the rural economy reviving in the short run.
The growing popularity of Ola and Uber has no doubt reduced the need for having personal vehicles and that might be affecting car sales, as the finance minister observed. However, the government can’t shirk responsibility for adding to the list of poor regulations – expensive steel and fuel along with high GST and cess lie at the root of the auto sector slowdown, which only the government can fix. The industry is right about demanding reduction in GST. However, the government remains non-committal given its poor finances accentuated by the shortfalls in tax collection and now corporate tax cuts in a slowing economy. Yet, GST cut is the minimum that’s needed on the part of the government. That would mean a short run hit on tax revenue but increased sales volume should make up for lower GST rate.
Despite the worsening slowdown, customers have responded enthusiastically to budget SUV offerings by new entrants – MG and Kia Motors. That some auto companies are doing better than others offers lessons for players in a cost-conscious market where buyers want more for less. Obviously, auto companies will need to align their product portfolio to changing consumer preferences. This is not something that the government can fix.
NBFC: One-fifth of lending in India is through the NBFCs. NBFCs were lending at a faster pace than banks in the past few years, earning them the nickname “shadow banks.” However, the situation changed suddenly after 2018. The financial default of its debt obligations by IL&FS in September 2018 impacted the business of several lenders such as banks, insurance companies, mutual funds, pension funds, and other NBFCs. This “India’s own Lehman crisis” has cast a negative shadow on sub-sectors within the NBFC’s making Housing Finance Companies (HFCs), Asset Management Companies(AMCs) the most vulnerable. Credit disbursal volumes fell by 17 percent in October - December 2018 (compared to the previous year). Except for gold and personal loans, industry-wide loan sanctions fell by 31 percent in January –March 2019 (on year-on-year terms) as per Finance IndustryDevelopment Council (FIDC) statistics. Two-wheeler loans are down by 15 percent while used car loans are down 7percent. The auto finance industry got hit because of the sales slowdown in the automobile sector. The overall NBFC industry loan sanctions fell from Rs. 9.65 lakh crores(2017-18) to Rs. 9.06 lakh crores down by 6.1 percent. TheNBFCs are bleeding while their business size is collapsing at a faster pace than anticipated.
In depth analysis will be covered in further posts.
