Assume you go to the gym one morning. The moment you reach, you are informed that you have won a lucky draw and you shall be getting a cashback of ₹ 1000.
What do you do with this amount? Say you choose to wine and dine tonight. A portion of the money would flow to the liquor store. The storeowner would pay wages to the workers who in turn, would buy their daily groceries. The grocer would accumulate this amount for the school fees of her children. The school would use this amount to pay to the teachers and teachers would use this amount and their residual savings to buy a new car.
This entire spiral in economic activity. A thousand rupees come to one person, and suddenly everyone is better off by some amount.
Now, what if the reverse happens? You’ve been robbed off by ₹ 1000. Forget wine and dine; you would cut down your expense that you were certain you would do. Now, this is where the downward spiral of the economy begins, also popularly referred, 'The Slowdown.'
Here it is how we are here…
Demonetization takes the biggest blame for it. All of a sudden, the entire cash from the market was in the banks. In the country where 68% of bank branches are in urban areas, the rural citizens were left to the doom. The buyers did not have debit cards, and the sellers had no PoS terminals. No money could move; no transaction could happen; hence, no economic activity could take place. Rural laborers and farmers left with nothing; No resources to produce or invest.
The 'Gabbar Singh Tax’
This was the next nail. A shoddy, unplanned and hasty GST came into place on July 1, 2017. The complications in the filing, untrained tax officers, frequent rule changes, refund delays made it unpopular among small businessmen. Small business with little capital found it tough to comply with. Ease of business deteriorated. Lesser profits led to another downward push.
Effect on Consumption
This is what every school of economics teaches. Never let the demand fall. Unfortunately, the Pandora box was opened. Due to reduced economic activity, consumption got affected. In any slowdown, people initially start abstaining from luxury and move to give up the necessary.
The real estate received the first blow. It affected laborers, cement & steel industries, and banks. Banks were the next. The demand for loan receded, their already running projects shut down, and NPAs mounted.
Slowly, all sectors started swaying away in a slowdown: Automobile, textile, aviation, housing, steel, FMCG.
Investors' confidence and the economic indicators are at an all-time low.
Here are a few instances
Automobile braking down
This is the most important economic indicator. It caters most jobs after infrastructure. Sales have gone down by 9.5% in FY2020 Q1. The same indicator was over 50% growth at the same time last year. Car, two-wheelers, even tractor sales are down. Dealerships are closing nationwide
The pimple-on-ulcer moment came in this budget. Despite falling growth, the GST on imports on vehicle parts was increased. Registration cost for vehicles increased. It appeared as if it was a deliberate move to strangle the sector
No surprises there are news of many plants shutting down for some days
The demand for loans, primarily commercial loans, slowed. Despite rate cuts by RBI, banks are not in the condition to afford rate cuts. Most of the money they invested post-demonetization was in the NBFCs. However, due to the lack of economic activity and resulting job losses, the money could never come back. IL&FS breakdown is part of the same story
(Not-so)Fast Moving Consumer Goods
FMCG slowdown was the biggest surprise. Toothpaste, soap, shampoo, biscuits are part of our daily lives. Even in the 2008 downturn, these companies stayed unaffected. One can understand how bad the Indian poor have faced the wrath of slowdown that they have to cut down the basic necessities. Even in the textile domain, the undergarment market sees the fall. This was unimaginable!
Britannia said that people are now thinking twice, even buying a ₹5 biscuit. The new Titan of the business 'Patanjali’ has reported a 10% loss this year.
Housing, steel, railway freight, new projects: you name it. All are winding down. The consumption of finished steel grew by 6.6% in Q1 FY 2020, in comparison to 8.8% in Q1 the last year.
The value of new investment projects announced during Q1 FY 2020 fell by 79.5% (worst since Q2 2004)
In other news
Wrapping up on a few, aviation has again slipped off the cliff. Indigo profits fell by 92% to a meager ₹20 crore. Jet Airways has already shutdown. Air India losses go without mentioning.
LIC posted a loss of ₹57000 crores, thanks to the government who forced it to buy a stake in loss-making PSUs like IDBI and others.
On a serious note, markets look at the government in such conditions but here the government do not have any money. They reached out to RBI for ₹1.76 Lakh Crores
If they really want to do it bona fide, the government should acknowledge that there is a slowdown. Banking and Housing need a stimulus. The amount from RBI should be spent here.
GST should be rationalized in both, taxes and the process, to bear fruits in long run.
Government should finance as many infra projects so that money reaches the rural India. Once they have money, we will have an upward spiral the way explained in the opening of this long saga.