Much of the discussion over the past few months has concentrated on India’s sharp loss of financial momentum. The large issue is whether structural or cyclical is the continuing slowdown.
The usual thumb rule is that the policy reaction to a slowdown occurs through economic reforms that relieve supply limitations. And with measures to boost demand, a cyclical slowdown must be addressed. India is presently facing an issue of structural demand, making policy decisions more complicated.
The prism of a growth recession is another way to look at the scenario now. A recession is defined by economists as three successive quarters of contraction. During a recession, economic growth slides into adverse land. A recession in development is distinct. The economy is not shrinking, it keeps expanding but at a slower rate of sequentially.
In the previous 10 years, India has experienced three such growth recessions. The first episode occurred in the instant wake of the US-born financial crisis. In the three quarters from June 2008 or the second quarter of the fiscal year 2009, economic growth dropped sequentially. It was a sharp downturn, but brief.
The second episode followed the wore off impacts of the stimulus of 2009. Over the three months ended March 2011, economic growth peaked but slowed after that for five successive quarters. The political paralysis of the Manmohan Singh government’s last years has also pinched.
Since 2008, India has been in the third growth recession. For four successive quarters, economic growth has already slowed sequentially. Economic growth is very probable to be slower in the quarter ended 30 June than in the quarter finished 31 March, at least following the recent high-frequency information, as well as numerous forecasts by economists from the private sector. The latest information on the collection of goods and services tax (GST) is also an indication of weak national demand, although the fact that indirect tax collection is growing slower than nominal GDP development may also mean that demand shifting back to the informal sector after demonetization.
In other words, the present slowdown in development is extremely likely to match the one in this decade’s early years— although it could be shallower if one calculates the momentum loss from top to bottom. India’s quarterly development cumulatively lost 5.5 percentage points between quarters ended March 2011 and June 2012. A comparatively small 2.6 percentage pint loss in the present downturn.
What’s going on now? Many economists in the private sector seem to expect a cyclical resurgence after the present fiscal year’s third quarter. The Reserve Bank of India’s average growth prediction of 32 skilled forecasters in July was 6.9 per cent, a small 30 basis points reduced than the past poll’s average estimate. Since then, however, many have probably reworked their figures, bringing it nearer to 6.4%. But even that is greater than the latest quarterly growth rate and thus an indication that this fiscal year is anticipated to see a small recovery in development.
At this juncture, however, betting on a natural recovery in economic growth is highly dangerous. Slowdowns can feed on themselves through psychology. Consumer demand is weak, and the mess in the shadow banking system means families no longer have the leverage choice to keep consumption faced with slow development in revenue. International demand for exports has been crimped by the trade war. Therefore, there is a lot going on in the policy reaction.
The one major distinction between previously this decade’s growth recession and the present one is that India has more macroeconomic stability. Although the removal of foreign cash from the national capital market is a concern, the balance of payments is in better form. Inflation is the largest difference between then and now and monetary policy, the best bet. It operates with a lag in India of around three quarters, however, which implies that a cut in the pace today moves the demand needle nine months later. So, if demand continues to be destroyed, the fiscal lever may have to be used as a last choice. Ideally, it should be aimed at industries such as home construction, highways and automobiles with powerful connections to other areas of the economy.
Finally, a brutal fact: If the Indian economy continues to lose momentum over the next two quarters, then in a decade the nation will be in its longest growth recession.