For the last few months, there have been discussions about the slackness in economic activities, lay-offs in industries and closure of few industrial and business units across the country. A lot of concern is also expressed about the increase in unemployment, non-generation of new employment potentials and shortage of funds or money circulation in the market. Overall, the complaint is about the sluggishness in economic activities and a possible recession across India.

Plenty of indicators can signal a recession. These indicators could be increase in unemployment, decrease in exports, deficit in tax and revenue collection by government authorities, reduction in foreign exchange reserves, imbalance in the international balance of payments position, increasing burden of loans and debts from international institutions and foreign countries, and increase in fiscal and monetary deficit in the government budget. In addition to these, other indicators may be lack of purchasing power among consumers and decrease in agricultural and industrial production. All of this leads to reduction in Gross Domestic Product (GDP) ultimately resulting in reduction in per capita incomes. 

Currently, multiple areas within the Indian economy are adversely affected. Automobiles, housing, consumer durables, retail consumer trading activities, electronics, transport, ancillary industries, industrial suppliers, vendors for various consumables and spares, travel and tourism – the list is long. Sales have dropped drastically, leading to a substantial drop in revenue generation, thereby adversely affecting the payment of statutory dues, vendor bills and  employee wages/salaries. People are reluctant to start something new and invest funds in new ventures and businesses, since there is no clear picture of expected returns on investment and recovery of original capital.

The reasons which have been propagated or explained are both internal or domestic, and external or international. The internal factors which have caused this downturn can be attributed to demonetisation, introduction of GST, and high rates of taxation, complexity and procedures which, ultimately, are discouraging new business activities. The impact of climate change has also begun to show, especially through the drought in summer followed by heavy rains and floods and resultant damages of life and property through the monsoons of 2019.

The external factors are many and range from geopolitics to technology. Some of them are trade war between China and USA, unstable political situation in the Middle East and increase in global prices of petrol and petroleum products, devaluation of the Indian Rupee, Indo-Pak hostilities, rapid change in technology and resultant changes in regulations for encrypted communication and electronic products, transition from 4G to 5G technology, and rapid political and economic polarisation of various countries across the globe. Cumulatively, in an economically interdependent world, they are creating an adverse impact on the Indian economy.

To a certain extent, the reasons put forth, both domestic and international, do point to recession. However, there is another side to it as well, and that needs to be looked in to.

Depressions and economic slowdowns are a part of the normal business cycle and a subject matter of ‘macro’ economics. Only when the growth rate of any country is in the negative and has remained so for a period of two to three consecutive years can it be positively confirmed to be a recession. 

It is worth noting that as per the recent news in Economic Times, Ms Kristalina Georgieva, Chief of IMF, has stated that there is a synchronized slowdown the world over. An NDTV report as recent as 14th October states that the IMF has cut the global growth forecast for 2019. Even developed countries such as the USA and the UK, and big economies such as China are facing an economic slowdown, but they are expected to revive.

Globally, manufacturers have been the biggest victims for about last eight months, on account of the trade wars, especially between in USA and China, which has been going on for the last 18 months. This has caused a cut back in capital spending and has created the risks of economic slowdown. These international factors have also affected the growth of Indian economy.

Despite the shortcomings mentioned above, the government is still doing its best to give boost to the economy in terms of the various tax concessions and support schemes launched as recently as September 2019.

At the same time, however, a paradoxical situation has been observed. 

In spite of the so-called recession, the purchasing spree of luxury and midsize family cars is increasing; for some premium brand luxury cars, the waiting period stretches up to three, even four months.

The drop in the sale of small family cars is observable because companies have increased their capacity and it is the net increase that remains unutilised. 

Same may be the case for the housing sector. Builders and promoters have invested in lands and constructed an enormous number of residential flats with the expectation of earning a premium price with high profit margins, however the actual cost of construction is much lower and in control. It is the unsold flats that create an impression of a dip in the real estate market. The new generation is wise and calculative, and calculations indicate that it is worth paying rent vis-à-vis buying a flat and paying heavy loan instalments. There could be further sectors of the economy for which such fallacy can be demonstrated.

In the last two to three years, India’s economic growth rate has been reasonably encouraging. It is only this year that there has been a little sluggishness in the economy and a marginal drop in the growth rate. However, India’s growth rate is not in the negative. Hence, there are sufficient grounds to rule out the   existence of a full-fledged recession. What the Indian economy is currently going through can be only termed as a “slow down” and not a recession.

Ajit Phadke

Ajit Phadke, B.Com.(Hons), M.B.A., LL.B, has been operating as a freelance industrial consultant for 35 years and specialises in 100% EOU / Export / Import, Foreign Exchange Rules and Industrial Regulations.

The views and opinions expressed in the article are those of the authors and do not necessarily reflect the official policy or position of The Tilak Chronicle and TTC Media Pvt Ltd.

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