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The 3 Economic Challenges Facing India in 2019-20

By Finserv MARKETS - Dec 25,2019
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The 3 economic challenges facing India in 2019-20

India was riding high on economic growth and success until just 3 years ago; growing at an impressive speed of 8.86% until September 1, 2016. Then, it was a downhill journey until July, 2019 as it dropped to 5.99%. The economy started showing signs of recovery from July, 2017 and finally plateaued at 8.13% by March, 2018. Since then, GDP growth has seen a steep decline of more than 3% as GDP growth stood at just over 5% in June 1, 2019.

The 3 economic challenges facing India in 2019-20

It was November 8, 2016, when Prime Minister Narendra Modi decided to outlaw Rs. 500 and Rs. 1000 notes in the country. Demonetisation had a domino effect on the economy. Firstly, it led to rampant shutting down of small and medium-sized enterprises (SMEs) leading to millions of job losses. The ill-planned measure also brought down incomes in the agricultural sector thus slowing down consumption. A slowdown in domestic consumption again had a negative impact on the manufacturing sector.

Then, there was the double whammy of a hurriedly implement Goods and Services Tax (GST) which made it even more difficult for SMEs to grapple. Finally, the mountain of Non-Performing Assets (NPAs) or bad debts with banks, which peaked at 11.5% [2] as of March 2018, led them to become cautious in lending. While Non-Banking Financial Companies (NBFCs), which accounts for 40% of all consumer finance in the country [2], were actively filling the void left by banks until the IL&FS default of over Rs 1,500 crore happened. This created an immediate cash crunch as NBFCs relied on banks to get the credit and lend to retail customers.

As millions of retail customers relied on credit from these NBFCs to finance high-value purchases such as cars, two-wheelers, consumer durables and homes, the sudden unavailability of credit through NBFCs immediately had an adverse impact on consumer demand, thus bringing the economy to almost a halt.

The 3 Immediate Economic Challenges

  • Slowdown in consumption

One of the biggest challenges that the Indian government faces today is the alarming decline in consumption. From cars, two-wheelers, tractors, commercial vehicles and homes to everyday FMCG items, there is a significant decline in sales across all categories. Among them, the automobile industry is the hardest hit, with sales dropping by 30.98% in July, 2019. As demands for four wheelers decline, automobile manufacturers are reducing production, thus affecting 3.5 lakh jobs across the industry. 300 automobile dealerships across the country have already closed shop; unable to survive the drastic decline in sales [4].

  • 7 Indicators of Consumption Slowdown

Figures on Apr-Jun 2019 compared to Apr-Jun 2018

 

Indicator

April-June 2019

Domestic car sales

Less 23.3%

Two-wheeler sales

Less 11.7%

Tractors sales

Less 14.1%

Domestic commercial vehicle sales

Less 9.5%

Unsold housing

Increase of 7%

FMCG

Less 10% (Average)

Imported goods

Less 5.3%

 

  • PSB and NBFC Crisis

Public sector banks (PSBs) were sitting on bad loans or non-performing assets (NPAs) amounting to Rs. 8.95 lakh crore during the quarter of March 2018. Though, the NPAs have come down to 8.06 in March, 2019 [5], the government still needs to focus more on bringing some massive reforms in this sector to check NPAs. The recent infusion of Rs. 70,000 crore by the government into PSBs may not be enough.

To compound the problem in the financial system, non-banking financial companies (NBFCs) are also dealing with a mismatch between asset and liability. The problem has arisen because NBFCs mostly borrow money from banks for the short term but lending for the long-term. While the problem of asset-liability mismatch was already there with NBFCs, a series of defaults by IL&FS group companies that borrowed heavily from NBFCs have made matters worse for these financial companies. Perhaps, the central government’s decision to help NBFCs with a partial credit guarantee scheme worth Rs. 1 lakh crore will enable NBFCs to stand on their feet again.

  • Problems in the agriculture sector

Agriculture, forestry and fishing were key contributors to the gross domestic product (GDP) until 2004-05 at 21%. In 2018-19 it dropped down to 13.14%.

AGRICULTURE OUTPUT as a % of the GDP

The 3 economic challenges facing India in 2019-20

While agriculture’s share in economic growth has dropped down there are still millions of people stuck in the sector with negligible or no income. As a country moves from a developing stage to a developed stage, it’s important for those involved in the agriculture sector to move to other low-skill jobs, which is yet to happen in India. The current government has to really look at these problems deeply and find a resolution before embarking on the ambitious task of becoming a $5 trillion economy.

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