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Editorial: Chickens Come Home to Roost

Port Wings, 22 Jan 2020:

India, which till recently was hailed as the world’s fastest-growing major economy, has seen growth rate decline to a six-year low of 4.5 per cent in the September quarter of 2019-20

India will “struggle” to achieve 5 per cent GDP growth in 2020 as the significant deceleration in past few quarters was largely owing to credit squeeze which is a cyclical problem, said noted American economist Steve Hanke.

Hanke, who currently teaches applied economics at Johns Hopkins University (USA), pointed out that India experienced an unsustainable credit boom, and now the chickens are coming to roost with a massive pile of non-performing loans piled up, primarily at the state-owned banks.

“The slowdown in India is related to a credit squeeze, which is a cyclical problem – not a structural problem… As a result, India will struggle to make a GDP growth rate of 5 per cent in 2020,” he told in an interview. He also noted that India is already highly protectionist.

Hanke, who had served on former US President Ronald Reagan’s Council of Economic Advisers further said that Modi government has failed to make any big economic reforms.

“Instead, Modi government has focus on two things that are destabilising and potentially explosive: ethnicity and religion. This is a deadly cocktail. Indeed, many believe that under Modi, India is already being transformed from the ‘world’s largest democracy’ into the ‘world’s largest police state’,” the eminent economist, who is also a senior fellow and director of the Troubled Currencies Project at the Cato Institute in Washington said.

The decline in the growth of Indian economy has largely been attributed to the slowdown in investment that has now broadened into consumption, driven by financial stress among rural households and weak job creation.

The auto slowdown hit both automakers and auto component manufacturers as sales dropped across the industry. Between April and November of 2019, passenger vehicle sales were down by 18 per cent, two-wheeler sales dropped by 16 per cent and commercial vehicle sales plunged by 22 per cent, according to the Society of Indian Automotive Manufacturers (SIAM).

Fast-moving consumer goods (FMCG) sales also declined; Hindustan Unilever, the country’s largest consumer goods maker saw its volume growth halve to 5 per cent in the September quarter, versus 10 per cent a year ago. Parle-G, the country’s largest biscuit maker, saw sales drop so sharply due to a slowdown of rural consumption, that up to 10,000 jobs were estimated to have been at threat.

In the past few months, the Narendra Modi government announced several measures to rescue the economy. It has slashed corporate tax rates and announced a slew of measures to lend a helping hand to the ailing non-banking financial services sector. A Rs 25,000 crore fund to revive stalled real estate projects was also announced.

As 2019 drew to a close, Finance Minister Nirmala Sitharaman unveiled Rs 102 lakh crore worth of infrastructure projects to give the economy a push.

Even as the government has looked to address supply-side bottlenecks, economists have also said that the focus will have to be on reviving consumer demand.

All eyes will now be on the Budget Sitharaman will present on February 1. The wider expectation is that there will be some sort of income tax relief for individuals.

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