India’s financial crisis is “unprecedented”, said by Rajiv Kumar – Vice Chairperson of NITI AAYOG. Recently while addressing Hero Mindmine summit, Kumar said, “This is an unprecedented situation for the government of India. In the last 70 years nobody had faced this sort of situation where the entire financial system is under threat and nobody trusts anybody else. Within the private sector nobody is ready to lend, everyone is sitting on cash.”
What made the Chairperson comment something like this? Presently India is facing a severe demand slump which has not only affected the automobile sector but several other sectors as well which has the potentiality of severely damaging the growth potentiality of India. Finance acts as lubricant that helps the economy in moving smoothly. If the finance fails, the real impact falls on the economy. Two such examples in the recent time is the decline in the automobile sector that lead to 3.5 lakh job losses in the last month and the textile industry that already counted for 10lakh employment loss. What is even worse is that this job loss figure is expected to touch 10lakh in automobile sector and almost touch 90lakh in the textile industry. These figures include each and everyone who are directly or indirectly attached to the sectors. But what is the reason behind the downturn that lead to such employment loss?
The downturn in the automobile sector is mainly due to the crisis prevailing on the non-bank financial companies [NBFCs]. The automobile sector greatly relied on the NBFCs for financing customers & dealers. After the crisis in Infrastructure Leasing and Financial Services (IL&FS) it became difficult for NBFCs’ to borrow money from the banks or sell the bonds to mutual funds which ultimately restricted them from further on-lending their customers. Subsequent result, auto buyers failed to purchase cars and dealers became incapable of holding their inventory which thereby resulted in huge stockpile up in the inventory levels. Due to this huge pile up of unsold cars further production was forced to be stopped whose repercussions felt both in manufacturing units as well as ancillary industries. Another obvious reason may be, in last two decades, the automobile sector had an enormous growth and had reached the peak. According to business cycle, which is an upward and downward movement curve, with rapid economic activity the “boom” occurs and the consequently the business reaches at its peak and henceforth come the period of relative stagnation or recession. After some time, the business will again breathe the fresh air, become lively yet again and the business cycle will again repeat itself. The reason behind saying this is, consumption level in India has been rising since 1992 and this rise cannot be ever increasing. According to the business cycle stagnation would come and it has arrived now. Let us go into some detail to understand this.
Cars comes under the category of luxury goods in India and the market of this sector is highly urban centric. Only 30% of India’s population resides in urban cities whereas 70% is still living in rural sectors. So, the business was highly dependent on this 30% population. Now, India is a country where most of the families come under the category of middle class. This class of people obliviously desire for luxury items but their purchasing power is limited. The average number of members in an India family is five and hence one car is enough for a family. It is apparent that they are not going to buy cars for each member. As consumption increases, the day of reaching the saturation level also approaches. Most of the families having purchasing power are reaching the saturation level, resulting in the demand decline or rather stagnation in their demand.
On the other hand, the textile industry that employs more than 10 crore people directly or indirectly claims that due to excess capacity in spinning inside the country and lack of demand for yarn in the overseas market have resulted in pile up of yarn stocks & liquidity crisis in the sector. According to the industry body, due to the sharp decline in the exports for the yarn, the cotton-spinning industry has been in dire straits and struggling to earn profit over the years. In addition, availability of cheaper imports, central & state level export taxes, high rate of interests, increased cotton prices in recent times which lead to increase in input costs have lead to financial stress, stop further production and shut down of mills.
What Effect Did It Bring Down?
The automobile sector employs approximately 3.5 crore people directly or indirectly whereas the textile sector employs 10 crores. Now out of this 13.5 crore if 1 crore jobs are lost from textile sector and 10 lakhs from auto sector, then a total of 1.10 crore people are losing their jobs. Here we need to understand that its not only 1.10 crore people losing their jobs but 1.10 crore families source of income are being affected or lost because India is male dominated country where in most of the families the prime earner remains the father or the son. Therefore, a loss of one job will affect 5 people (avg. no. of people in an Indian Family) and simultaneously the loss of 1.10 crore will have an impact on 5.50 crore people.
Now, due to the job loss of the prime earner of the family, the financial capabilities of each and every member will get severely affected and hence their purchasing power will decline sharply. This will ultimately affect the entire economy of the whole country and lead to a slump in demand. Now Indian economy had a major problem since it was Liberalized Privatised and Globalized. The development had become urban centric. Rural sectors were just ignored. Therefore, the market was highly dependent on the urban population which comprised of only 30% of the population. As we had stated earlier, as the consumption level among these urban population were rapidly increasing since 1992, they are now reaching the saturation level and hence there is a decline in their demand. However, this saturation was well expected and is the reason why since 2007 government was trying to establish its market outside India – in the African region, Central Asia, ASEAN region etc., though such efforts were not successful as they were expected. Many programs and policies such as Make in India, Skill India, Pradhan Mantri Kaushal Vikas Yojana etc. were also initiated but even they were also not as much fruitful as were needed or forecasted.
Now the problem is becoming even more severe as in one hand the consumption level is moving up to saturation level, on the other hand the rate of unemployment is increasing. Every possibility is there that this effect will spiral out in coming days. What is more worrying is that this effect might spiral out of proportion also. Consumption is the most vital part of the Indian economy which constitutes approximately 3/5th of the Indian economy. Slowdown in one sector is bound to affect the whole economy. For example, we know that a decline has been observed in the sales of biscuit companies also. It is in the air that about 10000 jobs are under threat from just one company. Due to such jobs losses, the foremost effect will fall on the FMCG (Fast Moving Consumer Goods) sector. Already a slowdown had been observed in the volume of growth in this sector. Sales of Hindustan Unilever Ltd had dropped to 5% between April & June from 12% during the same period of 2018. Dabur India had reported 6% growth in the volume in the same period compared to 21% growth in the previous year. Britannia’s sales moved to 6% against 13% in the previous year. These shocks may be become more sever in the coming quarter and all these were bound to happen. The reason behind this is again the consumption matrix – a downfall in one sector having impact on another. As people are losing their jobs in the auto sector and textile sector, their purchasing power is declining. As a result, they are forced to cut down their everyday expenses. Now, this curtailment in the daily expenses are lowing the revenue of the FMCG companies. The companies are forced to stop their excess production leading to further employment loss and thereby declining the purchasing capacity of more families. For instance, if a person is facing financial crisis, he will even reduce the usage of soap, shampoo, toothpaste etc. to save money and spend it on basic eatables. While speaking on eatables, the hotel and restaurant sector strikes our mind. Yes, with the loss of employment and reduction in purchasing capability, the growth rate will also deteriorate in this sector too. Restaurant foods are obviously luxury items. The law of demand says with the decrease in income, the demand for luxury goods reduces. Hence we are able to see how the spiral effect is multiplying its impact and leading to more and more loss of employment and also creating a demand slump.
Now, if this spiral effect keeps on continuing, the country’s economy will not take much time to be in a dire strait. It should be noted that presently a decline has taken place in the GDP growth rate. It was expected that there would 7.3% rate of growth which has declined to 5%. However, the GDP is still rising. The pace of growth has reduced but it is still rising. In conventional sense GDP is defined as “measure of all goods and services produced inside the boundaries of a country.” John Lanchester defined GDP in How to Speak Money as – “GDP can be thought as a measure not much of size… It measures the movement of money through and around the economy”. If this spiral effect is not stopped, it will not destroy the GDP growth rate but also bring down the rate to GDP to negative integers. Negative GDP implies to a contraction in the economy of a country during a quarter of a given year.
Now, the issue is what can be done to come out of this disastrous predicament? Till now we have been discussing about the problems and its impact. Let us now analyse the possible remedies to these problems.
The present scenario demands the implications of Keynesian Economics. John Maynard Keynes, a British economist developed Keynesian Economics during the great depression of 1930s. The theory says to come out of an economic depression government must increase its expenditures and reduce the taxes in order to stimulate demand. Keynesian Economics stresses on optimising economic performance and preventing economic slumps by influencing aggregate demand through activist stabilization & government’s economic intervention policies. The Indian Government must imply this principle immediately. It can increase its expenditure in various sectors like the infrastructure sector, construction of roadways, increasing electrical generation capacity, enhancing railway infrastructure, transmission lines, production of air conditioners, increase in exports etc. If government can increase its expenditure, then those people who are losing their jobs in different sectors will be able to find a job in these areas. This will result in reviving their financial crisis and increase their purchasing power and infuse a new demand in the market.
Secondly, demonetisation and GST implementation had hit the market hard which resulted in slowing down of economy at the initial stages. By rationalising the GST rates, which is being greatly demanded by the auto industry, demand may also grow up. This will again bring employment opportunities for the people who had lost their jobs.
Thirdly, government should implement innovative ways to fix the labour-incentive sectors such as automobile sector, textile sector and the real-estate sector. Real estate sector which also provides employment to lakhs of daily wage labourers is also facing an acute slowdown which demands immediate fixation. Among other reasons, one reason behind increasing rate of unemployment in this sector is that investors had completed the constructions years ago. While the construction phase was prevailing, the sectors provided huge employments to the labourers. But after the constructions were completed, most of them remained unsold. The unsold constructions are now getting sold, thus economic transactions are taking place but as the rate of new constructions have declined, rate of employment has also greatly affected.
Fourthly, since 2018, liquidity crisis has crippled Indian banks & NBFCs. This has forced them to choke credits to businesses which greatly affected the MSMEs (Medium and Small Scale Enterprises). Additionally, the negative impact of demonetisation also fuelled in worsening the conditions, hence a liquidity boost was necessary.
Fifthly, government needs to focus on the ignored sector, i.e. the rural sector. Till today development has mainly been concentrated in the urban sectors. As a result, rural sectors remained under developed. India is a home to 1.3 billion population out of which 70% is rural population. No such infrastructures had been developed in the rural areas which would infuse their demands. 70% of 1.3 billion is a massive figure. If by implementing effective government policies, the purchasing power among those people can be increased, desire for various goods can be properly infused backed by enhanced infrastructural facilities, bring a variety in their choices, demand for goods will automatically rise in rural sectors. If this sector can be successfully monitored, it will create a huge demand and a massive domestic market leading to a great economic potentiality. It will create an enormous employment opportunity and will totally restrict the slump in demand presently inflicting pain in the Indian economy.