New Delhi, India – SK Jain has seen many economic ups and downs in the decades he has been running his car parts company in a satellite city on the outskirts of the Indian capital, New Delhi. But these are exceptionally bad times, he says.
“In the past things would move by hook or by crook, but nothing is moving at all now,” Jain told Al Jazeera. “We’ve been in this business for 30 years and I’ve never seen it this bad.”
Once the world’s fastest-growing major economy, growth in India has skidded in recent months, creating a serious challenge for the government as it gets ready to present its annual economic report and its budget for the financial year starting April.
For the three months ending September, the country’s economy grew by 4.5 percent, according to the latest official data. That was its slowest pace in more than five years, and significantly slower than the 7 percent clip it clocked up in the same period a year earlier.
The main reason for the slowdown was a drop in private investment and consumption.
Part of the blame for the deceleration lies in factors beyond the government’s control, including a global slowdown brought about by a trade war between the United States and China and tensions in the Middle East that have driven India’s imported energy bill higher.
But it has also been exacerbated by some poorly calculated economic reforms that could have been avoided.
And the outlook for people like Jain and others in India appears to be gloomy.
The government recently projected economic growth of 5 percent for the current financial year, down from 6.8 percent last year, which would make it the slowest pace in 11 years.
Without the economy growing at a healthy clip, everything – from government revenues to individual incomes – is being adversely affected, analysts say.
“What we are witnessing now is a new phenomenon,” Sunil Sinha, principal economist at India Ratings, a Fitch unit, told Al Jazeera. “Demand has collapsed. We’ve never had this before. Under such situations, policy-making is tricky,” he said, as the government has few resources to boost the economy. “Its options are very limited,” he added.
The slowdown can be traced back to controversial flagship reforms by Prime Minister Narendra Modi’sgovernment implemented in the past few years.
These included a sudden clampdown in November 2016 on more than 80 percent of the currency in circulation in a bid to crack down on illegal activities. That was followed by a significant sales tax overhaul the following summer that created confusion and compliance burdens for many small companies, leading to a drop in business activity.
This, along with a government decision to not increase the minimum price it pays farmers for their produce, hit incomes in both urban and rural areas, curbing the spending power of many people.
In a November 14 note, Anthony Nafte, senior economist at Hong Kong-based capital markets and investment group CLSA, warned that the Indian economy was now in a form of “recession”, the kind in which banks prioritise protecting their capital bases rather than making new loans.
Meanwhile, companies and households are prioritising the repayment of loans rather than taking out new borrowings for investment and expansion, he said.
Government data released in December shows that 18 out of the 23 industry groups in the manufacturing sector experienced negative growth during the month of October 2019 as compared with the same period last year. Of those, 10 saw a double-digit dip and the electricity sector saw a record contraction of 12.2 percent, the third consecutive month it had shrunk.
During a debate in parliament in December, Finance Minister Nirmala Sitharaman acknowledged that there was a slowdown but said there was no recession.
“Growth may have come down, but it’s not recession yet or it won’t be recession ever,” she said.
India Ratings’ Sinha said what the government needs to do to revive the economy is a “no brainer”.
At the top of his wish list is for the government to push money into infrastructure, especially in rural regions, as doing so will create jobs for those most in need, who will, in turn, help drive sales of everything from tea and biscuits to soap and toothpaste. The problem, however, he points out, is that because of the economic slowdown, “where will you get the money to fund that?”
The bigger problem with the slowdown, warns Madan Sabnavis, chief economist at CARE Ratings, is that “no one knows what’s the solution. We’ve entered this trough. Economies don’t recover that fast.”
Modi’s government has taken several steps, including cutting corporate taxes, implementing a bailout package for the cash-strapped housing sector, promises to speed up infrastructure spending, rolling back newly introduced taxes on foreign investors, and schemes to hand cash to farmers to boost investments and encourage spending.
But they have not given the economy the boost the government intended. And in the process, it also appears to have run out of options, Sabnavis told Al Jazeera.
The only way out, he says, would be for the government to become more profligate.
Currently, the government limits itself to spending more than it makes in revenues by no more than 3.3 percent of the size of the Indian economy.
Sabnavis suggests that the government could loosen that rule, and expand the so-called fiscal deficit by at least another half a percentage point, or $15bn.
“That’s an ideological call, but it’s the only practical way of pushing forward the economy,” he said.
When times are bad, companies would rather conserve their cash than invest in new plants, equipment or people, if they believe that demand for their products is falling. And when companies slow down, so do tax revenues for the government.
That makes it all the more important for the government to boost spending during downturns, even if it means expanding the deficit, Sabnavis says.
Car parts maker Jain, like many other business people, agrees that this is not the time for him to invest.
His three factories in Gurgaon on the outskirts of the Indian capital where he makes components for transmission systems for India’s largest carmaker Maruti Suzuki, as well as Mahindra and Mahindra and Toyota, are running at 70 percent of their full capacity. Revenues for the current year are already down 15 percent after also taking a hit in the last financial year, owing to the government’s tax overhaul and demonetisation policy.
His pain has been particularly acute because 65 percent of his revenue comes from Maruti, which has seen an 18.6 percent drop in sales of passenger vehicles in India in the current financial year starting April through December and reportedly shed 3,000 temporary jobs last year.
“We are under tremendous pressure. There are no sales, no margins,” he said. “We’re like the beggars on the street who have to manage with what they have.”
While domestic players like Jain are holding off investing for lack of demand at home, exporters in at least some sectors – who should theoretically be able to take advantage of overseas demand – are also feeling the pinch because of government policies.
Garment exporters have traditionally benefitted from tax refunds that they factor into their prices while bidding for export orders. In the past several months New Delhi has rolled those refunds back and promised to replace them with new ones. But it has not.
“We can’t quote our prices because we don’t know what the refund will be,” Animesh Saxena, who exports womenswear including dresses, skirts and blouses to clients in the US and Europe, told Al Jazeera.
Bidding for contracts without that refund results in his firm, Neetee Clothing Pvt Ltd, being priced out by Saxena’s rivals, in a sector that operates on razor-thin margins.
“The whole sector is in jeopardy and we have not been able to compete internationally. We’re losing on orders placed earlier and we haven’t been able to book new ones. It’s badly hurting our bottom line,” he said.
Jain says his margins are also being squeezed, as he feels the pressure to maintain jobs and provide his employees with a sense of security.
“People have been working with us for years and we want to look after them but how long do we sustain them? The costs are increasing with all of this. How do we manage?”