Slowdown signals

Next govt faces a daunting economic challenge

India’s largest carmaker, Maruti Suzuki, has reportedly cut production by 26.8 per cent in March 2018-19 because of a slowing demand in India’s passenger vehicle market. The cutback is significant as it comes after at least three years of strong double-digit growth. Maruti Suzuki isn’t alone. A combination of factors, including the tightening of credit norms by financiers and declining urban sales and slowing rural offtake, has forced every other automobile company to pare production. The automobiles sector is just one example of the slowdown, which is gripping the economy. Growth in consumer spending, which accounts for nearly 60 per cent of the economy, had slowed to 8.4 per cent in the October-December quarter, compared with a revised 9.9 per cent increase in the previous quarter, leading policy advisors to worry that the slowdown could hurt the manufacturing sector, hitting engineering, textile and some other labour-intensive sectors. And the worst fears are coming true, as the latest trade data shows non-oil, non-gold imports contracted for yet another month — falling 3.7 per cent in February, following on from a 0.8 per cent fall in January. This is a disquieting trend, as it suggests sluggish industrial demand within India. But the worst may not be over. An expected deceleration in economic growth in major economies around the world, including China and the US, is expected to hurt trade growth further.

That’s not all. Industrial growth in January slowed to 1.7 per cent compared to the 2.6 per cent growth in December last year, stoking fears that the fourth quarter of this fiscal year may be as sluggish as the previous quarter. The third-quarter GDP numbers, released by the Central Statistics Office (CSO), showed what most economists were predicting — that growth was slowing. At 6.6 per cent growth, it was the lowest in five quarters. The CSO also reduced its growth estimates for the full year to 7 per cent from the 7.2 per cent estimated earlier. This also means that the last-quarter GDP growth will be even lower. The crisis may accentuate, with weakening global growth (the World Bank has estimated global economic growth to decelerate till 2020 at least), rising oil prices in recent weeks, slowing growth in government spending on infrastructure, and delays in investment decisions because of uncertainty about who will form the next government. 

The data from the Centre for Monitoring Indian Economy showed investments in the December quarter fell to a 14-year low, dashing hopes of a quick economic turnaround. The decline in fresh investments was across the board, with all major sectors witnessing a fall. Adding to the gloom is an RBI study that showed that for the seventh successive year, there had been a contraction in the private sector’s capital expenditure plans. Other signs of distress are quite high as well. Small and medium industries continue to suffer; core sector growth is at a 19-month low, and third-quarter profit growth among big corporates was at a much slower pace than earlier. Once the elections are over, the new government and its finance minister will have a big problem on their hands — how to fix an economy facing too many headwinds.