Moneycontrol Published On: Nov 07 2019 By: Rahul Agarwal
Indian economy is going through a slowdown or a growth recession for the last few quarters; the last published GDP data for April-June 2019 suggested that the economy has decelerated to the 2013 levels.
Latest data on manufacturing suggests that the cooling of manufacturing conditions in India continued in October, with both factory orders and production rising at their weakest rates in two years.
Business confidence slipped to the lowest level in over two-and-a-half years, while input costs fell for the first time in over four years. India’s manufacturing purchasing managers? index (PMI) fell from 51.4 in September to a two-year low of 50.6 in October, narrowly avoiding slipping into contraction (below 50 indicates contraction).
Although, an economic slowdown is a global phenomenon, with economies around the world either contracting or witnessing a sharp slowdowns, in the Indian context the slowdown is accentuated by the two pillars of the Indian economy viz. automobiles and the real estate sectors.Since both these two arms of the Indian economy directly or indirectly affect other facets of the economy and are also among the biggest employment providers, the effects of a slowdown are clearly visible and are directly felt by the common man.
The last few quarters have been the worst quarters for the automobile sector in a decade with pressure across segments. Weak consumer demand has led to OEMs resorting to production cuts to reduce inventory. OEMs have also resorted to deep discounting across segments but that has only helped sales marginally. The following chart captures the impact of the slowdown on auto sales across the industry.
Although, the festive season did bring some cheers to the auto sector but these sales, to an extent, were catalysed by deep discounting that was on offer on all major auto brands across segments.
Data suggest that on a MOM basis the auto companies have witnessed some pickup in consumer demand however it remains to be seen if the trend would persist.
Real estate sector is another sector that contributes a major chunk of economic growth and job supply but here also the growth trends are similar to the auto sector.
Since demonetisation the sector has witnessed some serious troubles and in-spite of several incentives from the Government, real demand has failed to pick up. The following numbers depict the decelerating sales trends across major metros in India.
The top seven cities across India reported a decrease in sales by 20 percent over the previous quarter. New launches across these cities decreased significantly by 34 percent over the previous quarter while, unsold inventory marginally decreased by 1 percent over the previous quarter, primarily due to sales exceeding the launches during the quarter.
Expectations of a near term recovery in both these sectors appear to be far-fetched. After years of robust expansion, the auto industry is grappling with over capacity. With the cost of ownership going up, traffic conditions in major metropolitan cities deteriorating and the rapid expansion of ride aggregators it appears the consumer demand has also taken a paradigm shift.
The industry in our opinion has to readjust and accept the new normal of moderate growth. The real estate sector has seen fundamental structural changes after the passing and implementation of Real Estate Regulation and Development Act 2016, although the act is a welcome step towards consumer protection in the longer term the immediate effects on consumer demand have been debilitating.
Furthermore, demonetisation and increased curbs on black money have led to a demand squeeze as the avenues to park black money into real estate have been limited to a large extent.
The recent government steps to boost the economy through corporate tax rate cuts and other incentives and a series of rate cuts by the Reserve Bank of India have improved the sentiment.
While the RBI has been able to lower interest rates, policy rate cuts have not been fully passed through to new rupee loans. As a result, inflation-adjusted (real) borrowing costs have increased, weighing on credit demand.
The larger credit squeeze mainly emanating from non-bank financial companies (NBFCs) liquidity crisis has contributed to an investment-led slowdown that has broadened into consumption squeeze, in addition rural distress in several states has further made the slowdown deep and pervasive.
The government so far has been proactive in identifying and addressing the issues that the Indian economy is grappling with but much more needs to be done to stimulate growth. The possibility of a sharp recovery is remote as the recent government interventions would take at-least a couple of quarters to really show-up in corporate balance sheets and income statements.
Furthermore, both the auto and the real estate sectors are grappling with cyclical and structural issues that will take a long time to be overcome and although we can see some green shoots but a sustainable growth path is still far away.
(The author is Director at Wealth Discovery/EZ Wealth)