Slowdown and the Stimulus – the complete guide

A. The Slowdown

The Indian economy is in the grip of a deep slowdown. We faced this type of an adverse environment during the time of the global financial crisis (2008-09). Now, over the last couple of years, what we are experiencing is falling economic momentum that is visible from almost all sectors of the economy.

Declining investment, falling sales, stagnation in employment, poor credit growth -all tells the different sides of the slowdown trend. We can sense the fall of economic activities from the real estate sector as well.

The final outcome of these downward factors is that they have brought down the GDP growth rate. GDP growth has been coming down during the last five quarters.

There is no disagreement that the economy is going through a tough period and symptoms of an uptrend seem to be far away.

The slowdown is not a domestic phenomenon, rather most of the world economies are facing the syndrome.

We have to analyse the nature and causes of the current economic problem that we are in.

1. What we are experiencing – slowdown or recession?

Technically, the current situation can be described as a severe slowdown and not a recession. To understand it, we have to go through the definitions of both terms.

What is recession?

A recession is a decline in real Gross Domestic Product for two or more consecutive quarters.

So, recession is declining economic activity measured by contraction of GDP for two or more successive quarters. It is not just declining GDP growth but declining GDP itself – that is the difference. Decline in GDP happens when the economy registers negative growth rate.

For India, the GDP is not coming down or not undergoing contraction. Rather, it is growing but the rate of growth is declining.

A well-known US research entity – the National Bureau of Economic Research (NBER)- defines recession as “a period of falling economic activity spread across the economy, lasting more than a few months.”

In the past, several developed economies have registered recession. The US economy recorded recession in 2005 and 2008. At present, economists warn that the US is moving to a recession, powered by trade war.

What is a slowdown?

A slowdown is a situation of declining growth rate of GDP. The economy is moving forward, but its growth rate is falling. There need not be a contraction of GDP actually in the case of slow down.

For India, the GDP growth rate has been falling over the last five quarters. Hence, we can say that the economy is undergoing a slowdown and not a recession.

Quarter	Example for recession – GDP growth rate (quarterly)	Example for slowdown (GDP growth rate quarterly)
Q1	-1.7%	5.8%
Q2	-1.3 %	5%

Table: Example for recession and slowdown

What is the extent of the slowdown for Indian economy?

This question is very important while quantifying the depth of the current economic problem. Recession is typical problem that usually happens to a developed economy. These economies are already grown big and there are limitations for them to grow further. So, they usually face recession. It is a state of contraction of GDP or registering negative GDP growth rate.

On the other hand, for a robust and dynamic emerging market economy like India, the standard of GDP growth rate will be much higher. A developing and exuberant economy like India is supposed to achieve a growth rate of 8 per cent to 10 percent.

Recession is decline in GDP; it is contraction of GDP. Negative GDP growth for successive periods shows recession. Slowdown is decline in GDP growth rate for successive quarters.

But now, the economy is growing at around just 5% with slowing trends in production, employment, demand etc.

Understandably, the slowdown that we are experiencing now is the equivalent of recession experiencing in an advanced economy. The seriousness of the situation is equal.

At the same time, the term slowdown is not enough to explain the grave situation that we are experiencing; it is more than that. The term slowdown is quite generic and loose and doesn’t indicate how deep the problems are. A decline in GDP growth, independent of its gravity is called as slowdown. A fall in GDP growth rate even if for two quarters or ten quarters, is described as slowdown.

Since terminologies are not available enough to explain the macroeconomic conditions of emerging market economies, just we can say that our economy is going through a deep slowdown.

2. Six indicators that point out a slowing economy

What are the indicators of the ongoing economic slowdown in India?

Now, our economy is not growing at a rate that is the standard for an emerging economy or that justifies its past performance. Following are six important indicators which tells us that the economy is in some sort of a trouble.

(1) Declining growth of real Gross Domestic Product,

(2) Decrease in rural income,

(3) Falling employment levels,

(4) Declining manufacturing activity and industrial production,

(5) Falling retail sales,

(6) Declining credit growth.

Continuing crisis in the banking and NBFC sectors adds to the negative trends. Falling credit growth is also caused by weaknesses in the banking system.

Table: Quarterly growth rate from Q1, 2017-18 to Q1, 2019-20.

Quarter	Growth rate
Q1 2017-18	6
Q2 2017-18	6.8
Q3 2017-18	7.7
Q4 2017-18	8.1
Q1 2018-19	8
Q2 2018-19	7.1
Q3 2018-19	6.6
Q4 2018-19	5.8
Q1 2019-20	5

Figure: Quarterly growth rate from Q1, 2017-18 to Q1, 2019-20.

(1) Declining GDP growth statistically tells about the slowdown

The first one ie., declining GDP growth is the result of the last five factors. GDP growth has declined from 8.1 % during the fourth quarter of 2017-18 to 5% during the first quarter of 2019-20. So, the GDP growth rate has been declining over the last five quarters continuously.

Quarterly GDP growth doesn’t tell anything about the reason behind the slowdown. Actually, GDP growth rate is the end product of the economic activities. It just arithmetically shows us the extent and duration of the economic fall. We have to look on the sectorwise indicators to see what is causing the slowdown that can be seen from the GDP growth rate. The other five factors tell this.

Six factors –  that triggered the slowdown in the economy Banking sector and the prolonged NPA problems: Banks can’t lend significantly, as far as their balance sheets are weak. The prolonged NPA problem tempted them to stay back from credit expansion. The next uptrend will happen only with credit expansion. Farmers income fall: Farmers are facing income fall due to adverse terms of trade. Agricultural prices are not increasing but the prices of other materials are increasing. Similarly, farmers living expenses to spend on industrial and service items going up. Global factors: Trump’s trade war created trust deficit in international trade. Another factor is the rising crude prices. Similarly, foreign capital is showing outflow trends. Quick pace of reforms: GST implementation slowed down business activities as its procedural complexities discouraged big traders to procure materials from small unorganized players (downplay the point in exams). Formalization driven away the informal sector from the value chain: Formalization of economic activities is always desirable. But its sudden implementation without preparing the small businesses slowed down economic activities. Demonetisation: Demonetisation was a bad vibe. It disrupted and disturbed India’s production and business networks that were conducted mainly in informal ways (downplay this in exams; just for understanding).

(2) Declining credit growth

Perhaps the most important indicator for a coming slowdown is slowing credit growth. Consumption, investment and the resultant spending are boosted by credit given by banks. If that credit growth is poor, it means the consumption and investment spending are coming down soon.

Whenever an economy registers a reduced credit growth, it’s a warning for slowing spending and the resultant reduced growth.

(3) Decrease in rural income

Nearly 45% of the population of India lives in rural areas. Fall in rural income in recent years has led to reduced purchasing power with the rural people.

In recent years, demand for both consumer durables and non-durables have declined because of low purchasing power with the rural people.

Why Slowdown is expectations related? Businesspeople loss confidence in getting profit and fear losses when they feel poor demand conditions. They track demand for their products and if they find that demand is going to be low in future; they reduce investment and production. So, ultimately, it is expectations and momentum that drive economic activities.

(4) Rising unemployment rate

The periodic labour force survey concluded that unemployment is rising at a higher rate. This trend is strong in both rural and urban areas. Rising unemployment deprives income of the people and this leads to reduced demand.

(5) Falling manufacturing output

In every country, recession and slowdown are highly correlated with the poor performance of the manufacturing sector. Manufacturing or the industrial sector is considered as the economic engine and it can support substantial proportion of the workers. Poor industrial growth shows the depth of the slowdown.

For India, the manufacturing growth declined to 0.6% during first quarter of 2019-20. Growth of the core industries came down sharply to 0.2% in June 2019; from 7.8 per cent in June 2018.

Table: Performance of the core industries in June 2019

Month (2019)	Growth rate of the core industries
April	6.3
May	5.1
June	0.2
July	2.1

(6) Falling sales and real estate prices

Sectors where consumer income is quickly and visibly spent – automobile and real estate sector have suffered the worst in recent quarters. Declining automobile sales and falling real estate prices shows that the slowdown is deep.

Falling sales leaves tens of thousands of employees jobless. This is the leading adverse factor that produces inability of the people to buy goods, reduction in demand, sales, production etc. Once people start to lose their jobs, slowdown spread like a wildfire.

3. What are the causes for the slowdown?

There are some visible domestic and global factors that triggered the slowdown in the Indian economy. Domestic factors can be cyclical issues and structural problems. Global factors are the deepening trade war and fall in international trade.

1. What are the structural factors?

The structural factors are always there. India’s industrial sector is not progressing at the right pace. The country remains importer of major machineries and electronic goods.

Similarly, Indian manufacturing firms are not having the competitiveness to produce quality components and thus to participate in the global value chain network.

In the case of agricultural sector, the sector was not able to achieve productivity and thereby releasing the unemployed population to the industrial sector.

How structural problems can be corrected to treat the slow down?

Here, the government has to make substantial economic reform to strengthen vital sectors like manufacturing, construction etc. Technology adaptation and productivity expansion are necessary to make our industrial sector competent with the rest of the world. This will take substantial efforts, time and need good institutions.

In the medium term, revival of industrial sector investment, production, employment etc is the best way. All these are closely related or are the same.

1. What are the cyclical factors

Cyclical factors are those repetitively comes. An example is the higher volume of NPAs with the banking system. Without solving the banking sector problems, sufficient delivery of credit to the various sector becomes difficult.

How cyclical factors can be corrected?

Cyclical slowdown can be corrected by stimulating demand. Additional expenditure by the government or reduced taxes etc., can stimulate demand in the economy.

Why automobile and real estate sectors are vital to measure the slowdown?  – these are the two sectors where mass demand lies. India is a consumption-oriented economy where domestic consumption drives our economy. In China, slowdown can appear with reduced production in export sector as the Chinese economy’s demand is driven by foreign demand. Given the primacy of the domestic consumption in India, the two sectors where mass demand lies are the automobile and real estate. When the demand or prices of these two sectors fall, it is an indication of a coming slowdown.

What are the global factors that contributes to slow down in India?

In the global economy, continuation of trade war between the US and China produced uncertainties. Exports are not going up; countries are adopting restrictive policies on imports. Higher crude prices adds to the external sector problems.

Similarly, global capital flows (like foreign investment inflow to India) are coming down fearing a slowdown in the developing world and recession in the advanced world.

4. What will be the visible trends in immediate future?

Whenever adverse economic situation like slowdown that pinches the economy and starts producing chaos, individuals restructures their activities.

Especially businesspeople and the rich goes risk averse. They will not spend or invest substantially. This of course deepens the slow down.

Following are some of the immediate effects in near future:

1. Prices of safe assets may increase eg., gold.
2. Land prices may come down because of falling business, industrial and other commercial property demands.
3. Stock price may come down with the intensity of the slowdown unless liquidity is poured into the market through policy initiatives.
4. People may spend less especially the rich. This may add to the problems.

These immediate effects may change with the operational factors like  the type of stimulus, the role of global factors and the quickness of recovery.

5. What policies have to be adopted to fight the slowdown?

Slowdown is not due to absence of resources or shortage of labour; but reduced demand in the economy from low income with the people.

For the investors they track demand to make investment and production decisions. When there is general pessimism about future prospects, they hesitate to invest. So, investors are not ready to invest or produce now because of slowing demand for manufacturing items.

Here, the only and the sustainable way to retrack the economy is to improve business sentiments. Higher credit to households, along with increased government expenditure may tempt the business to raise production and investment.

No tax cuts or incentives will be successful unless businesspeople find it safe to invest. In this context, there are three necessary ways for bringing up the business momentum.

1. Rejuvenate industrial production by giving confidence to the industrial sector. Reducing taxes, providing incentives, making higher government expenditure in the market, attracting more foreign capital etc., will be helpful.
2. Add strength to new lines of production – like electronics, machineries etc. This required more commitment, effort and time. Higher the number of sectors and industries where we can competitively produce items, more will be our ability to enhance employment, income and thus our capacity to avoid future slowdown. It is the industrial sector that is the engine of the economy. Services sector is a residue of the industrial growth.
3. Government should not produce bad vibes through error policies or penny taxes that destroys business confidence. Any misstep, even if for regulation sake or for tax revenue gain, may adversely affect business sentiments.

6. Whether the government capable to bring back economic momentum or to counter the slowdown?

Given the tax resources and financial capacity of the government now, it is difficult to force back the economy through making government expenditure or tax cut alone.

But given its policy capability, the government can bring back growth momentum through sophisticated policies. Here, it is very important that every government step should nudge the investors and households to spend more.

Remember, a conducive policy may be valuable than millions of rupees worth of tax cut or expenditure commitment by the government. There are two options for the government to manoeuvre the economy in this difficult time.

First, policies like promoting credit expansion by ensuring bank’s health (capitalisation) will raise credit growth. At the same time, it should not be excessively used; otherwise it will raise NPAs further in future.

Second is that the government can launch long term infrastructure investment. This will enhance the flow of money to the economy.

Similarly, it helps the business to reduce their cost of doing business and household to get better living conditions.

B. The Stimulus Measures taken by the government

Till this time (September 21, 2019), the government has launched five rounds of interventions to fight the slowdown. Following table illustrate the measures taken by the government.

1. First Stimulus -August 23^rd, 2019

First stimulus August 23rd, 2019
Date	Steps	Possible Effects
August 23rd, 2019 First stimulus –     FPI, Housing sector, Corporate sector	Roll back of surcharge applicable on FPIs	These measures will help to inject more funds to the economy, besides encouraging more investment. Liquidity situation also will be improved with more funds with banks and NBFCs.
	Removal of angel tax for registered start-ups
	Incentives to MSMEs
	More NHB loans to the housing sector
	Withdrawal of criminal treatment for CSR failures.
	Liquidity support to NBFCs.

 

2. Second Stimulus – August 29^th and 30^th of 2019

Second Stimulus- August 29 and 30, 2019
Date	Steps	Possible Effects
August 29, 2019   Second stimulus – FDI and manufacturing	Local sourcing norm for single brand retail diluted	Higher investment by single brand MNC firms may occur.
	100% FDI under automatic route for contract manufacturing.	This will help the long-term revival of the value chain network. Component making in the country will go up with the participation of more foreign investment.
	Liberalisation of digital media- investment up to 26% is allowed.
August 30, 2019 Second stimulus (b) – Banking Sector	Additional capitalisation worth of Rs 55000 cores for PSBs	Lending capacity of the PSBs will improve thereby encouraging lending.
	Merger of 10 PSBs into four banks	Efficiency in PSBs may improve.

 

3. Third Stimulus – September 1, 2019

Third Stimulus September 14, 2019 Focus: Export and Housing Sectors
A. Measures for the Export Sector
	Measures	Likely impact
1.	Remission of Duties or Taxes on Export Products scheme for export sector in the place of the Merchandise Exports from India Scheme (MEIS). Nearly Rs 50000 crore incentives will be provide to the sector.	The higher allocation may promote the export sector. Exports declined during June 2019 and this is the poorest export performance in nearly 40 months. Stimulation of the export sector is vital for recovery. Another fact is that the MEIS was a replacement candidate as it was supposed to be WTO incompatible. This because of the dispute filed by the US against the MEIS and five other export incentives at the WTO.
2	Dubai-like annual mega shopping festival at four places across India by March 2020	The step will have only limited impact as shopping festivals will be successful mainly in low tax jurisdictions. The lower tax rate in Dubai, Hong Kong etc may make such events successful. Besides, the low foreign passenger inflows to the country is also a problem. In the past also government designed such efforts; but failed.
3.	Automatic reimbursement of their input tax credit (out of GST).	This will give relief to the exporters as a tax administration created difficulty has been overcome. Exporters were always complaining about slow reimbursement of their tax credit from the GST department.
4.	Extension of the Export Credit Insurance Scheme by Export Credit Guarantee corporation.	This will facilitate credit assistance to exporters as their loans are readily and quickly insured by the ECGC.
5.	Enhanced Priority Sector Lending (PSL) for Exporters. And additional loans worth between Rs 36000 cores to Rs 68000 crores will be proved under the PSL.	The export sector is eligible for priority sector credit extended by scheduled commercial banks. As per the RBI norm, banks should give 40% of their loans to the identified priority sector including agriculture, Export sector, MSMEs etc.
6.	Effective monitoring of Export Finance by Department of Commerce.	Export Finance situation will be monitored by the Inter-Ministerial Working Group in the Department of Commerce for facilitating export finance.
7.	Use of technology to ‘reduce the time to export.’	Timely completion of the ongoing incentives will be realised with the help of technology. Meaning of this step is that the delay in the delivery of export incentives will be removed.
8.	Online ‘Origin’ Management System	FTA participation requires that countries should certify how much of a particular country’s product is originated (value added or created) in that country. Such certification will be made quickly.
B. Measures for the Housing Sector
	Measures		Likely impact
1.	Special fund for stalled housing projects in the affordable and mid-income housing sector. The government will provide Rs 20000 crore funds for the stalled projects which are non-NPA and those comes under bankruptcy procedures. For this Rs 10000 cores will be procured from funding institutions like the NIIF. Funding: The government of India on the lines of the NIIF can contribute to the fund while the rest of the investors would be LIC and other institutions and private capital from banks, sovereign funds, and DFIs.		This will help to the inject liquidity into the real estate sector. Injection of money into the construction sector without creating NPAs has a high value given the housing sector’s ability to boost the economy.
2.	External Commercial Borrowings (ECB) norms liberalised to attract funds to affordable housing schemes including the PMAY. ECB is simply availing loans from foreign countries.		The ECB guideline liberalisation will be made in consultation with the RBI. Advantage of the step is that the fund will be directly going to the government designed programmes including the Awaz Yojana components. Details about the measure are to be designed by the government and the RBI.
3.	Interest rate of the House Building Advance availed by home buyers will be reduced and made equal to the return of 10-year government securities.		This is a marginal step, still it will reduce the cost of funds for home buyers.

 

4. Fourth Stimulus – September 19, 2019

The fourth stimulus is extension of credit to various sectors of the economy including MSMEs and NBFCs.

Fourth Stimulus September 19, 2019 Focus: MSMEs, NBFCs etc.
	Measure	Likely impact
Loan melas in 400 districts for various sectors	Loan mela Phase – I Banks and NBFCs will visit 200 districts between 25th and 29th of September, to disburse credit to retail customers, farmers, and micro, small and medium enterprises (MSMEs).	This will enhance loan availability to various sectors. At present, the credit growth is low, and the expansion of credit will help the economy to revive. The impact may be low because of the current NPA ridden situation of PSBs.
	Loan mela Phase -II The remaining 200 districts will be covered in the second phase, that is scheduled between 10th and 15th of October.
2. MSMEs	Credit Expansion to MSMEs: Banks should not declare stressed assets of MSMEs as non-performing asset (NPA) till 31 March 2020	This step will enable the NBFCs to avail more loans from banks. Still, the possibility of loan generation depends upon the approach of banks.
3. NBFCs	Banks should provide liquidity to NBFCs through various arrangements. Already 15 bank-NBFC liquidity arrangements are working. Several such linkages are on the implementation stage.	Here also, the approach of the banks is important as the general financial conditions of NBFCs is not very fine.

 

5. Fifth Stimulus – September 20, 2019

Fifth Stimulus September 20, 2019 Focus – Corporate Tax cut and GST rate cut
A. Mega Corporate Tax cut
	Measure	Likely impact
1.	Corporate tax rate is now 22%. The basic corporate income tax (CIT) rate for Indian companies reduced to 22%. The aggregate tax rate will be 25.17% including cess and surcharge. Companies availing this new rate should not claim any deductions and exemptions.	Effectively, the CIT rate has been brought down from the previous high of 34.93% to 25.17%. This step is remarkable as it will improve investment sentiment in the economy India is now switched to a low-to moderate tax regime. Investment will be attracted both from domestic and foreign sources. The fiscal impact of these step is the negative outcome. Government here is will be losing tax revenue of around Rs 1.45 lakh crores. This may increase the fiscal deficit to nearly 4% of GDP for 2019-20.
2.	15% tax rate for new companies (registering from October 1, 2019).	Total tax here with cess and surcharge will be 17.01%. This will encourage new investments.
3.	Minimum Alternative Tax (MAT) has been reduced to 15% from 18.5%.	MAT rate is now just seven percentage lower than the basic CIT rate (22%).
B. GST relief
1.	GST rate for several hospitality services reduced. GST rates for rooms above Rs 7500 now reduced from 28% to 18% For rooms that have a rent between Rs 1001 to Rs 7500 now reduced to 12%.	This will increase spending in the hospitality sector.
2.	For outdoor catering, with a daily tariff of Rs 7501, the rate is now reduced from 18% to 5% without input tax credit.
3.	Exemption of small assesses from annual return filing for 2017-18 and 2018-19. Assesses who have a turnover of below Rs 2 crore now need not file annual returns.	Reduces the procedural difficulty of small service taxpayers.
4.	GSTR return filing deadline extended for composition scheme entities: Taxpayers under the composition scheme (entities have a turnover upto Rs 1.5 crore) have to file their returns only by November 30, 2019.

The stimulus interventions have effects on different sectors including, exports, housing, services and corporate investment. Similarly, they may have some tax outgo effect especially the step taken by the government to cut corporate income tax. At the same time, the reduction in CIT will enhance positive investment sentiment in the economy. This is what needed right now stimulate automatic increase in expenditure.