In its report on Asia’s development outlook, the Asian Development Bank (ADB) highlighted the emergence of Bangladesh as the fastest growing economy in Asia, wrestling away the honor from India that had remained at the top for several years. This is a significant development, as like many other growth parameters, the ADB’s assessment objectively puts the severe downturn faced by the Indian economy in perspective.
There is no massaging the truth that the Indian economy is in dire distress, with the auto industry alone losing over 300,000 jobs since the slump became visible in April of this year. Indian Finance Minister Nirmala Sitharaman, who has been under fire for the poor performance of the sector, has repeatedly refused to accept the downturn and has feebly pointed fingers at the rise of on-demand mobility players like Uber and Ola to be the cause of the auto debacle.
Maruti-Suzuki, the leading original equipment manufacturer (OEM) in India, announced that it saw a 24.4% decline in total vehicles sold year-on-year this September. Declining vehicle sales is a ubiquitous problem across the spectrum as passenger car sales in India fell by 24.8% this September compared to the same month in 2018. Commercial vehicles also registered a 45.4% decline year-on-year.
Two-wheel automobiles, which arguably are the mainstay of Indian private transport, also saw an 18.21% decline in sales year-on-year this September.
Though the auto jobs lost can be attributed to the fall in consumerism, it would be hard to pinpoint concrete reasons for the dampened buyer sentiment, as there are one too many factors that play a role in the downward economic spiral.
The rut started in 2016 with the poorly timed banknote demonetization announced out of the blue by Indian Prime Minister Narendra Modi, rendering 86.4% of all Indian currency notes worthless at midnight on November 9, 2016 – just over 24 hours after the announcement, which took place at 8:15 p.m. on November 8.
The idea behind the move was to put an end to a shadow economy that primarily consisted of small-time players and middlemen, and to force them into paying taxes. India has notoriously low taxpayer numbers, with less than 5% of the population paying income taxes. Government tax revenue was nearly non-existent within the shadow economy, and the bulk of the cash was being stored as unaccounted wealth or black money.
The government expected this move to cull around 20% of all the demonetized notes, as most of the black money was thought to have been stored in those denominations.
However, a year after the announcement, the Reserve Bank of India, or RBI (India’s Fed equivalent), declared that 99.3% of all the demonetized banknotes had been deposited into the banking system, virtually rendering the exercise worthless, as it did more harm than good. The people had found ways to deposit their black money into the banking system, and the government had very little to show for this elaborate exercise.
Demonetization paralyzed the small- and mid-tier businesses in the country, as financing for their operations petered out. Thousands of companies shut down as a direct consequence of this move by the Indian government.
Next came the Goods and Services Tax (GST) of 2017, which was a pivotal change in the Indian commercial tax structure and a source for a major disruption in the way businesses work in the country. The GST replaced the differing tax rates of individual states within India with a single tax structure, aligning the economy better and making it easier for intra-state trading.
Although the change was welcomed, the manner of its execution was botched, with the government changing GST tax rates frequently to placate protesting businesses. Revamping tax structures within companies was an ordeal, which combined with recurring changes to tax rates made it even harder to do business.
The final nail in the coffin came in the form of a financial crisis in 2018, when Infrastructure Leasing & Financial Services (IL&FS), an Indian money-lending major that had lent over $25 billion on finance projects, went bankrupt. The government was forced to step in to avert a potential recession that could have been triggered at the collapse of IL&FS.
Such non-bank financial companies like IL&FS form a significant part of India’s lending market, especially for the auto sector. However, with the fall of the lending giant, banks started tightening credit, fearing their clients might default on their loans, which led to a further cash crunch amongst consumers.
In late August, the Indian government – in a rare display of desperation – sought the help of the RBI to inject 1.76 lakh crore rupees (~$24.7 billion) from its surplus reserves into the sagging Indian economy to loosen credit within the banking sector. This seems to have had an effect, with September showing moderate gains month-on-month.
Nonetheless, the economy continues to be in a state of a slowdown from where it was last year. The Indian purchasing managers index (PMI) of manufacturing for September hovers at 51.4 – a number that is unchanged from August, and is the joint-lowest value since May 2018. Meanwhile, market intelligence firm S&P Global Ratings has cut India’s GDP growth projection for 2020 from 7.1% to 6.3%.
“India’s slump is deeper and more broad-based than we expected. In the March-June quarter, the economy expanded by just 5%, well below potential, which we estimate to be north of 7%,” said the S&P Global Ratings report. Most alarming has been the precipitous decline in private consumption growth that had been the engine of the economy in recent years – down to about 3% in the March-June quarter.”