Even when the June quarter GDP came in at just 5%, most policy makers were refusing to acknowledge that it was an economic slowdown. Actually, it is time to admit there is a distinct economic slowdown and take quick measures. We are lucky to be at the start of the slow down cycle and need to act fast before its hits jobs and income levels.
Signs are everywhere
The signs of an economic slowdown are almost everywhere. Auto numbers are down nearly 30% on a YOY basis and auto companies are being forced to cut production days to balance demand. Most economic slowdowns begin with a financial tightness and that is visible from banks to NBFCs. Another way is to look at rising instance of defaults in loan repayments, which is normally a clear lead indicator of an economic slowdown. We had IL&FS, Dewan Housing, Cox & Kings, Suzlon, RCOM and now Altico. Each of these cases highlight that payment cycles are stretched to such an extent that managing asset liability mis- matches is getting tougher by the day. No less a person than the CFO of Parle has warned about the huge layoffs that may be necessitated due to weak demand. Even other FMCG companies like Britannia and Marico have warned that slowdown is beginning to pinch. Aviation growth is sharply down and the biggest manifestation came in the form of the GDP at 5%. Rural inflation is also an eloquent reminder of a slowdown.
Monetary measures needed
The government needs to bundle a bunch of monetary measures quickly so that the early signs of slowdown do not exacerbate into something big. The first thing required is to embark upon big cuts in repo rates. Forget about all else, the real interest rates in India at above 4.25% are among the highest in the world. The government has to infuse a lot more capital into banks to make them capable of lending; otherwise output is not going to pick up in a hurry. The next step is to make liquidity easily available to the stressed sectors like NBFCs, realty segment, auto dealers, auto ancillaries etc. These are sectors where an infusion of easy liquidity will show immediate results. Low rates and abundant liquidity are the answers.
Fiscal push too
Fiscal measures alone won’t suffice. India will have to give up its obsession with FRBM and adopt pump priming as a conscious strategy. This includes major spending outlays on projects for infrastructure, more of helicopter money payouts and aggressive tax cuts. If GST cuts and income tax rebates can spur spending, then it is absolutely worth the risk. After all, once the slowdown is allowed to fester, it starts to hit jobs and spending. That has already begun and it is essential to act fast. As spending returns, it will automatically solve the slowdown challenge! ©