Hard Times: How do we know India is facing an economic slowdown – not just a temporary speedbump?

Last week, Mukesh Ambani, India’s richest man, announced something that has been obvious to anyone observing the Indian economy: that there is a slowdown. Ambani tried to soften the blow, calling it a “slight” slowdow, and insisting that it is “temporary”. But he acknowledged it nevertheless.

Is India’s economy in slowdown? It is amazing – and yet not entirely surprising – that this can even be a question for some. Prime Minister Narendra Modi’s government has put tremendous effort and time into convincing the Indian public that nothing is wrong with the Indian economy.

The government has claimed that India’s is still one of the world’s fastest-growing major economies. That an auto industry slump is just the result of millennials moving from car ownership to Uber and Ola. That growth-rate maths does not matter because that did not help “Einstein discover gravity”. Even that three movies doing well at the box office prove that there is no slowdown.

Above all, the government has sought to confuse the wider public on this account, and to fall back on its tried and tested tactic of insisting that any criticism is politically motivated.

But this much is clear: the Indian economy is slowing down massively.

How do we know this?

The methodology to calculate India’s Gross Domestic Product and its growth rate was updated in 2015. Ever since this change in the formula, there have been credible questions from economists all over the world about whether it is throwing out accurate figures.

Among those raising questions has been Arvind Subramanian, Modi’s own former Chief Economic Adviser, who wrote in a paper that the GDP growth rates might be inflated by as much as 2.5 percentage points.

The government has pushed back against all of these questions, insisting that all criticism is political rather than economic.

Here’s the thing, though: You don’t need to look at contested alternate calculations to see India’s growth slowdown. It is there in the official figures, the ones endorsed by Modi and his finance ministry.

In the first quarter of Financial Year 2019-2020 (which goes from April-March), the GDP growth came down to 5%, below the 5.8% of the previous quarter and the 5.7% expected by analysts. That is five straight quarters of declining growth, as well as a six-year low.

If you actually believed the criticism of the GDP calculating methodology, some may argue that the true growth number is lower. But, the fact is, you don’t need to go to alternate calculations to see the economy is in a funk. The government’s own numbers are saying so.

Why is this even debatable?

Maybe the most important thing to know about this current crisis for the Indian economy is that it has come despite relatively low inflation. That means prices of items, whether staples or luxury items, haven’t been going up. Instead, the slowdown has made itself apparent in a lack of growth, particularly of wages, of sales and, by inference, of demand.

Put differently, the indicators that reveal India is in slowdown are things like the following: income levels have remained stagnant. Sales of consumer items like two-wheelers and cars have fallen off a cliff. Farmers are notching up major losses. Investment levels have dropped massively. Banks aren’t handing out loans. Real-estate firms are facing collapse. Households are borrowing more and dipping into their savings.

Take any of these data-points separately and it might be easy to convince yourself that it is an individual problem. That it is just you who hasn’t got a raise or has unsold inventory or has to postpone buying a car, which may not be true for everyone. This is unlike inflation, when it is clear that prices have risen for everyone.

But data and its interpretation, ultimately, can be contested. Which is exactly what the government has done. Take the precipitous drop in car sales this year. Finance Minister Nirmala Sitharaman argued that it had to do with millennials preferring car-sharing apps like Uber and Ola instead of car ownership, and so did not a slowdown. The argument sounds compelling and so will convince a section of the people, even though the nation’s largest car manufacturer dismissed it altogether.

Now add the economic events of the last few years: demonetisation, a very complex Goods and Services Tax and a government tax regime aimed at putting the squeeze on everyone. Each of these came with a moral argument insisting that anyone critical was in favour of corruption, as well as a massive amount of government

Finally, there was the huge mandate for the Bharatiya Janata Party to return to power in the Lok Sabha polls. All of this put together may explain why people are susceptible to the argument that the pain they are facing is not shared universally.

But the data – including uncontested, government statistics – on this is clear: The slowdown is real, and it is affecting everyone.

Could it be linked to a global slowdown?

There is no doubt that the Indian economy is linked to international conditions. The global economy is currently facing significant headwinds, with many economists believing it could soon lapse into recession. This is partly aided by the global trade war between China and the United States, as well as a belief that some of the monetary policy levers used over the last decade may have had unintended consequences.

But insisting that this is solely responsible for India’s economic woes is a facile argument that ignores actual conditions.

India has in the past been able to chart a different path from the global economy, with an example coming as recently as the worldwide economic crash of 2008. Although India too felt the hit of the crash, it rebounded very quickly afterwards, while the rest of the world took half a decade to climb out of the morass.

Moreover, Modi came to power with extremely benign conditions five years ago. Yet rather than build on it, just as the economy was starting to grow, he introduced demonetisation and a badly designed Goods and Services Tax. This twin shock is now generally blamed for ensuring India would go into a slowdown, even though data will show that the slowing had begun even before demonetisation.

Or, as former Chief Economic Adviser Raghuram Rajan puts it:

“There’s an attempt to say this is because of the outside. The world is slowing. Well, the world actually was growing more slowly in the earlier period. Sometimes we want to pin it on oil. Oil is actually cheaper now than it was in the earlier period when we were growing strongly. Of course, sometimes we want to pin it on trade. Trade has been relatively weak in both periods. I think looking to the outside, to blame the outside for what’s going on is probably wrong. 

What is probably a better explanation is really, this is a consequence of not having invested. For nearly 15 years or probably, since the global financial crisis not having picked up the pace of investment, that’s one. And the second is the lack of reform; of significant reform over the same period and both those have combined with, these are acts of omission in some sense, with acts of commission. The sequence of Demonetisation and the goods and services tax essentially was a straw that seems to have broken the Indian economy’s back.” 

But isn’t India growing much faster than everyone else?

Growth is, by itself, not a good indicator of how robust an economy. That is because the growth rate is a reflection of how small or large the economy was in the first place, and how much it has changed since then.

India’s economy is still much smaller than that of some of the world’s major economies. So though a 6% growth rate might sound extremely fast when compared to the 2% numbers being notched by the developed world, it actually means India will continue to remain tiny in comparison.

As the Economist points out, “[China] is still adding the equivalent of a quarter of India’s economy every year. If India were to sustain its GDP growth per person of 7%—about its average for the past two decades—to 2030, it would barely have got to where China is today. And even that may prove ambitious.”

Could it be cyclical? Is a recovery around the corner?

One argument from those who acknowledge that there is a slowdown is an insistence that this is a cyclical problem, and not a structural one.

A cyclical slowdown assumes it is something like a seasonal phenomenon, where the business cycle has natural peaks and troughs and India just has to wait for the wheel to turn, and demand to return – helped by one or two-measures aimed at kickstarting the cycle.

A structural slowdown, however, is a reflection of something deeper. This would mean that certain fundamental conditions of the economy are responsible for the slowdown, and no quick fixes will resolve the problem. Ending such a slide will mean having to carry out genuine reform.

The government has argued that the current conditions are more cyclical than structural. Others have pointed out that, in fact, India has seen investment falling since 2011 – with no sign of the wheel turning.

The answer, however, for many is: It’s both. In other words, while current conditions – particularly the inability or unwillingness of banks to lend and policy uncertainty – may be responsible for the immediate slide, the downturn also reflects much deeper, structural problems that cannot be resolved through a short-term stimulus package.

Here’s the Reserve Bank of India’s Annual Report for 2018-19.

“A decomposition of various seasonally adjusted indicators of economic activity, aggregate and sectoral, into trend and cyclical components suggests the recent deceleration could be in the nature of a soft patch mutating into a cyclical downswing, rather than a deep structural slowdown,” the report says. “Nonetheless, there are still structural issues in land, labour, agricultural marketing and the like, which need to be addressed.”

For now, however, most analysts are expecting growth to remain subdued this year and few are expecting a return to an 8% level anytime soon.

So what caused it – and how do we fix it?

Answering both of those questions is a key part of the Hard Times series, in which we hope to both demystify all that is happening in the economy and also engage with thinking about what needs to be done to climb out of this hole.

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