Economic Update 2019: The Sinking Ship Needs Desperate Saving

This post I decided to look at the economic machine of India and try to build a story around it. The growth of economic system in India is sluggish at the moment. The economists speculate the future trends, opposition parties play blame-game and the markets react to every bit of news that is thrown in the ring. As a disclaimer I would mention that the post neither aims to support any authority nor does point fingers at them. However, it does try to state what is in store for the economy and the investors for the current fiscal. 

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ndian economy is observing a sluggish period of growth. There is a serious distress in some of the well known sectors of the economy. The rural demand has taken a huge hit as consumer durable sales have reported 5.9% growth (10.3% lower than the figure reported in 2018). Automobile sector is observing a slowdown too with huge inventory levels after models transition to BS VI norms. The slowdown points to the direction of high GST rates, liquidity issues in NBFC sector and stagnant wages. The corporate earnings are not in best shape and the Union Budget has failed its expectations earning the wrath of the investor community. The mess is too deep to be sorted so easily and for this post, I will try to hit on few data points which need the most focus for the Indian economy to realise its $5 trillion mark.

One of the important parameters to push the economy upwards is trade. History has examples of countries who have stepped out of poverty zone by pushing up their exports. However, to hike the exports, India should have requisite strength in its manufacturing prowess. To put some numbers to make the picture clear, India’s trade deficit narrowed from $ 16.60 billion in June 2018 to $ 15.28 billion in June 2019. It is a strong sign for economic growth and is mainly related to the slump in global crude oil prices. However, if we dig deeper, exports have declined by 9.71% with majority of the problem emerging from the petroleum production and rice exports which collapsed by 32.85% and 28.05% respectively. Crude oil production has stagnated from the past decade and Government has pinned its hopes on the Hydrocarbon Exploration and Licensing Policy (HELP). HELP policy gives hydrocarbon explorers to select the exploration blocks without waiting for the Government’s auction. The Indian Government believes that the HELP will usher in more investment, thereby pumping up the production activity. Rice exports have declined due to a weak demand coming from the African countries. The slump in demand is primarily stocking of inventories in Africa and which has led to a big diversion of Indian rice demand in Myanmar and China. In terms of rice exports particularly, India needs to gain a competitive edge against Vietnam who is now expected to grab the opportunity and raise its rice exports.

Another essential pillar for India’s progress is agriculture. Being an agri-based country, India is one of major exporters of agricultural commodities as they have slowly diversified towards high value pulses, fruits, vegetables & livestock. The way I see it, I see tremendous opportunity for India in agricultural domain. Start-ups and technology firms have started to explore avenues to use technology to support agricultural growth. The Government has started to use Artificial Intelligence on pilot basis for crop cutting and yield estimation under its flagship scheme Pradhan Mantri Fasal Bima Yojana. One of main problems in traditional agriculture is its excessive dependency on monsoons. AI is expected to help farmers to choose right crop for the right weather conditions and thus minimize the risk. The Government has also promised to double the farmer’s income by 2022 which will require a significant policy support. With 80% of farmers residing in rural areas, Government should set its focus on bringing in food security and sustainability.

The corporate numbers are showing weak signals which are still leaving their imprints on stock market (The markets have reported losses worth $20 bn in July 2019). The net profit of 281 BSE companies grew at 8.49 % in Q2 2019 till now. Compared to Q2 2018 growth of 23.8% and previous quarter growth of 5.67%, the numbers are quite alarming. (Take a note that the sample of 281 BSE companies excludes banks, financial institutions and oil & gas companies who follow a different revenue structure.) Manufacturing sector is also suffering from anomalies when it comes down to numbers. Since, it contributes 16% to the GDP, it is imperative to put manufacturing under the magnifying glass to understand the decline in corporate profits. The April-June quarter , the core sectors ( namely electricity , steel, refinery products, crude oil, coal, cement, natural gas and fertilisers)  grew 3.5 % as compared to 5.5% in same quarter for 2018. The core sector contributes 40% to index of industrial production and does have a timely impact on manufacturing sector as a whole. Crude oil output declined by 6.8 % in the June quarter. Also, steel and electricity collapsed by 6.9% and 7.3% respectively. The coal output grew by 3.2 % which was much less compared to the 11.5% figure reported last year. Cement and natural gas productions also ended in red territory. The code red situation in the sector has also laid its icy hands on employment situation too. As per the National Sample Survey Organization, manufacturing jobs have declined from 474 million in 2011-12 to 465 million in 2017-18. The unemployment rate has increased from 2.2% in 2011-12 to 6.1 % in 2017-18. Of these, unemployment amongst youth has soared from 6.1% to 17.8% with huge contributions coming from educated dissatisfied youths. With job market turning adverse, the Government has to focus not just on the quantity of jobs but also enhance it qualitatively. The authorities should also revisit the National Manufacturing policy drafted in 2011 which never stretched its wings to take the required flight. The policy formulated a strategy to enhance manufacturing to 25% of GDP which should be the ideal scenario if sinking sheep needs to be saved.  
To boost growth, RBI has cut rates for fourth consecutive time with current repo rate at 5.4%. Majority of banks have promised to link their deposits to the repo rate rather than relying on the MCLR. After a slew of negative performances, it is expected that the rate cut will usher in the required growth in performances.