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India has jumped 14 ranks in the World Bank's ease of doing business index to 63rd place in 2019 from 77th last year. The news could not have come at a better time; Indian economy is going through a prolonged slowdown and the sharp rise in ease of doing business index is expected to improve the confidence of both domestic and foreign investors.

Indian economy is in the grip of a disturbing slow down and needs fresh investment to come out of this impasse. After slowing down for four consecutive quarters, GDP growth has slumped to 5% in the first quarter of 2019-20, the lowest in six years. Be it falling automobile sales or rising non-performing assets of banks, sluggish consumer demand, poor export performance or declining manufacturing output; all have a role in this deceleration of growth rate. This is an indication of tough times ahead, country’s central bank has cautioned in its latest annual report.

GDP growth forecasts slashed

The RBI feels that the slowdown in April-June GDP growth rate was not an one-off incident but a prelude to a further deceleration in growth and it has reduced India’s GDP growth prospect for 2019-20 from 6.9% earlier to 6.1% now in its October Monetary Policy. RBI has blamed the weak demand conditions and poor export prospects, impacted by slowing global growth and continuing trade tensions, as among the reasons for slowdown.

Not RBI alone, global development institutions in general, predicted a further slowdown in India’s economic growth. The World Bank has cut India’s GDP growth for 2019-20 from 7.5% earlier to 6% now. “India’s cyclical slowdown is severe”, the report states. The bank projected 6.9% growth for 2020-21.

The International Monetary Fund (IMF) downsized India’s GDP growth rate projections to 6.1% last October from 7% it had forecast in July. While trade tensions between the US and China have hurt the Indian economy, India’s “governance of public sector banks and the efficiency of their credit allocation needs strengthening” IMF has suggested.

Earlier in September, the Asian Development Bank (ADB) slashed India’s growth projection to 6.5% from 7% it projected in July. ADB is optimistic and has projected India’s GDP to grow 7.2% in 2020-21 following government’s “proactive policy interventions along with a recovery in domestic demand and investment”.

The consumption arithmetic

The question is: What has caused this slow down? There are several reasons from falling global GDP growth to trade tensions between China and the US, but back home the prime villain has been the falling consumption expenditure.

Why are Indian households cutting their consumption expenditure? Most of the surveys on consumer behaviour suggest that Indian households are withholding or refraining from spending on consumer goods largely because of the falling confidence in the economy emanating from future uncertainty, stagnant job market and fear of job loss.

According to the RBI's monetary policy of last October, the consumer confidence dropped to a six years low. The Current Situation Index (CCI) reached 89.4 in the September 2019 round of the survey. In March 2019, the consumer confidence reached 104.6 and crossed the 100 mark for the first time after the December 2016 round. However, this jump was transitory. In the subsequent rounds, the consumer confidence index was on a free fall.

Consumer Confidence survey is conducted by RBI in major cities of India with over 5,000 respondents. The survey measures consumer perception (current and future) on five economic variables - economic situation, employment, the price level, income and spending.

The Consumer Confidence Survey has two main indices- current situation index and future expectations index. The current situation index measures the change in consumer perception over an economic issue in the last one year while the future expectations index measures what consumer thinks about the same variables, one year ahead.

This is reflected in sharp fall in the share of private final consumption expenditure (PFCE) in GDP.  The share has gone down by one percentage point between the first quarter of 2018-19 and the first quarter of 2019-20. The decline has been very sharp in the last two quarters – down by a huge 3.8 percentage point from 58.9% in the third quarter of 2018-19 to 55.1% in the first quarter of the current year.

That automobile sales have been plummeting for months or the number of unsold residential houses are piling up are a reality. A report from Anarock Property Consultants finds that sales of  residential units in seven major cities declined by about 18% in the July-September 2019 quarter over the previous quarter. New launches were down by 13% during the same time in those cities.

As for the automobile sector, the sale of passenger vehicles declined 23.5% during April-August 2019 over the same period last year. Within the passenger vehicles, the sales for passenger cars declined 29.4% during April-August 2019 over the same period last year.

But what must be the eye-opener, for the first time in seven years, the growth of FMCG in rural market was below that of urban India. Sales of FMCG are often looked upon as a barometer of overall economic growth and consumption due to the range and reach of products across price points. According to the latest study of Nielson, rural market grew 5% in the quarter ended in September 2019 compared to 8% growth of the urban market. The rural market grew by 20% in the same quarter last year. Rural India contributes 36% to the overall FMCG sales and has been growing around 3-5% annually.

Export market fails to expand

But if India has witnessed resistance in domestic consumption growth, it has failed to increase exports too, the alternative way to raise sales of its produces. Worse, exports have in fact, fallen in the current year so far.

According to the ministry of commerce and industry data the cumulative value of exports has declined 2.39% in the first half of the current year from $163.48 billion in the same period last year to $159.57 billion now. Exports in rupee terms have declined 0.42% during the same period from Rs. 11.27 lakh crore to Rs. 11.16 lakh crore.

To the relief of the government, the trade deficit during this period, however, has declined by $14.45 billion dollar despite a fall in exports. This was because the imports declined at a higher rate than that of exports during this period. Cumulative imports during April-September 2019 declined 7% from $261.63 billion in the same period last year to $243.28 billion. Cumulative imports in rupee terms declined 5.2% from Rs. 17.95 lakh crore to Rs. 17.02 lakh crore.

FDI inflow on the rise

What is heartening is that despite decelerating GDP growth, foreign investors have kept faith in the economy. This is reflected in the sharp rise in FDI inflows during April-June 2019 quarter, when India witnessed one of its worst GDP growths. FDI equity inflows rose 28% in the quarter.

Telecommunications attracted the maximum FDI of $4.2 billion, followed by services sector ($2.8 billion) in the first quarter. The services include financial, banking, insurance, non-financial business, outsourcing, research and development, courier, technology testing and analysis. At the other end, Singapore continued to be the top source of FDI with $5.3 billion, followed by Mauritius ($4.6 billion).

To attract foreign investors India opened its doors further, diluting the stringent condition of local sourcing for single-brand retail. It also allowed 100% FDI in commercial coal mining as well as in contract manufacturing through the automatic route, hoping to attract global vendors looking to diversify supply chains as the US and China battle it out in a tariff war.

In addition, the government had increased the FDI limit in insurance intermediaries to 100%. The government also allowed up to 26% FDI in digital news and current affairs media on a prior approval basis.

Global growth trend

After slowing sharply in the last three quarters of 2018, the pace of global economic activity remains weak. Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.

Global growth is forecast at 3.0% for 2019, its lowest level since 2008–09 and a 0.3 percentage point lower than what was projected in April 2019 World Economic Outlook of IMF. Growth is projected to pick up to 3.4% in 2020 reflecting primarily a projected improvement in economic performance in a number of emerging markets. Yet, with uncertainty about prospects for several of these countries, a projected slowdown in China and the United States, and prominent downside risks, a much more subdued pace of global activity could well materialise.

IMF, in its World Economic Outlook report, said that the Chinese economy could grow at 5.8% next year — slower than the 6.1% forecast for 2019. Growth has weakened in China and “the regulatory efforts needed to rein in debt and the macroeconomic consequences of increased trade tensions have taken a toll on aggregate demand” the report suggested.

Among advanced economies, 18 in the euro area, North America, and smaller advanced Asian economies is forecast to be considerably weaker in 2019. To forestall such an outcome, policies should decisively aim at defusing trade tensions, reinvigorating multilateral cooperation, and providing timely support to economic activity where needed, IMF has suggested.

Government initiatives

The big question in India is: How to reverse the downtrend? Apparently, raising consumption expenditure is the key to the revival of the economy right now. Higher demand will improve output generation; create more jobs and incomes which in turn, will help to maintain the tempo in demand growth.

The creation of more jobs remains at the centre of raising consumption expenditure. And for that the economy needs more investment, especially, in the private sector. With so many expenditure obligations, the latest being the proposed revival package of BSNL and MTNL, the government will find it difficult to spend over the budgetary allocations without distorting its fiscal deficit target. Keeping that in mind the Finance Minister has announced a massive cut in corporate taxes last September to leave more funds in the hands of industrialists for investment.

At the other end, the central bank has steadily cut the policy rate to make funds cheaper. After the last October’s cut, the repo rate stands at 5.15% and reverse repo rate at 4.90%. In total, the RBI has cut rate by 135 bps starting from February 2019 till today in five successive steps.

To attract more foreign capital the government has diluted the stringent condition of local sourcing for single-brand retail allowed 100% FDI in commercial coal mining and has increased the FDI limit in insurance intermediaries to 100%.

As for the rural economy, which has seen a demand deceleration as reflected in the slowing down of FMCG growth, the government has raised the minimum support prices (MSP) of rabi crops to raise farmers’ income. The MSP of wheat has been raised 4.6% or by Rs. 85 per quintal.  The increase in farm income is expected to improve rural demand.

One has to wait to see whether these measures will revive the economy or not. But the government is optimistic. Niti Aayog Vice-Chairman Rajiv Kumar has reportedly, expressed hope that GDP will grow by 7-7.5% in the second half of 2019-20. He said that the government will find additional revenues from disinvestments to boost the domestic economy as well as to revive investments and this will increase India’s competitiveness on the global stage. And if not by such a huge number, the global development bodies too expect the economy to improve in the second half.