Slowdown: Listen to sane voices

On May 16, 2014, benchmark indices Sensex and Nifty had hit a record high as investors celebrated the general election results. The BSE Sensex surpassed the psychological level of 25,000 for the first time. The 50-share NSE Nifty breached 7,500-mark to hit an all-time intra-day high of 7,563.

With the BJP winning 282 seats out of 543, the biggest government mandate in three decades, investors welcomed the decisive victory for Modi with hopes that his government would fast-track reforms and accelerate economic activity. By the time the Modi government completed 100 days in office, the Sensex had delivered 8.21 per cent returns.

Similar feel-good mood was expected to play out in May 2019. As expected, on May 23, Sensex and Nifty hit record highs, climbing 40,000 and 12,000 levels, respectively.

But there is a fundamental difference, as seen in the market’s behaviour, between 2014 and 2019: five years ago, the equity market witnessed sustained buying; in 2019 it has seen sustained selling, after the initial euphoria that the BJP’s thumping poll victory had created. In 2014, the sentiment was full of hope and optimism.

Modi inherited an economy that grew at 6.6 per cent in 2013-14 and was poised to become a $2 trillion economy in 2014-15. As a result, the market kept on rallying for a long time, adding more than Rs 50 lakh crore to investors’ wealth over three years. However, in 2019, a relentless sell-off has wiped off Rs 14 lakh crore of investors’ wealth.

The prime minister may have scored highs on the political front in the first 100 days of his second term, but the market has been left whining. This wasn’t entirely unexpected, given that GDP growth has been consistently on a downward spiral over the last few quarters; in the fourth quarter of last fiscal it topped off at 5.8 per cent.

So, while some gains on the indices were not ruled out, excitement over BJP’s victory was expected to be short-lived as focus shifted back to the fundamentals of equities and economy. Deterioration in macros and global uncertainly was bound to have an adverse impact on market which was trading at near peak valuations and at significant premium to other emerging markets.

A sharp correction was triggered by some of the market-unfriendly announcements in the budget on July 5, like the tax surcharge on FPI income, coupled with a marked slowdown in economic growth and a weakening rupee.

These factors pulled the market down by over 10 per cent, as foreign investors pulled out Rs 31,700 crore. To make matters worse, GDP growth for the June quarter of current fiscal fell to a six-year low of 5 per cent, in addition to the waves of not so great news from various sectors, including agriculture, manufacturing and services. The market reacted adversely to the GDP numbers, as the official data was a confirmation of the growing fear of a severe slowdown.

The doom and gloom following the release of June quarter GDP data, forced the government to announce a slew of measures aimed at boosting the economy hit by weak household spending, falling investment and muted corporate results.

Finance minister Nirmala Sitharaman also announced steps to shore up market confidence, like rolling back recent tax hikes on foreign and domestic equity investors. The government also further liberalised foreign direct investment rules in many sectors, in an effort to get economic growth back on track.

A third dose of economic adrenaline relating to housing and exports was announced last Saturday. Whether these measures are enough to stimulate demand and take the economy out of the woods is yet to be seen, but the market is certainly not exuding confidence and current growth trajectory also doesn’t inspire optimism.

A recent SBI report said that when GDP grew by 8 per cent in quarter one of FY 2018-19, 70 per cent of leading indicators, such as car sales, showed acceleration. In the June quarter, when GDP grew by 5 per cent, only 35 per cent of such indicators showed acceleration.

For the September quarter, only 24 per cent indicators show acceleration. This means, there could be more pain ahead. While the slowdown is real and more entrenched, which calls for coordinated fiscal and monetary response, the growth slump, according to economists, reflects that it is beyond just the cyclical aspects.

The government seems to be in denial mode about the deep and structural nature of the slowdown. A tweet from the BJP’s official handle on August 26 said India still remains the fastest-growing economy, which is surprising considering that India had already lost its fastest-growing tag to China in the previous quarter.

In the April-June quarter, China recorded GDP growth of 6.2 per cent, way above India’s 5 per cent. There is little doubt that Indian economy is in the grips of a crippling showdown. Therefore, the first step in a crisis, as former Prime Minister Manmohan Singh said last week, “is to acknowledge we are facing one.”

According to Singh, an eminent economist himself who successfully navigated Indian economy through both 1991 crisis and the 2008 global financial crisis, the slowdown would be “prolonged” as it is cyclical, as well as structural.

Calling for next generation of structural reforms to address the slowdown, Singh also urged the government to come out of “headline management”.

The former prime minister has suggested five points which require the government’s immediate attention: rationalisation of GST, even if it results in revenue fall in the short term; focus on increasing rural consumption and reviving the agriculture sector; reviving major job-generating sectors like textile, auto, electronics and subsidised housing; identifying new export markets opening up due to ongoing US-China trade war; and addressing liquidity crisis.

Alarming times need breakthrough measures; piecemeal measures will not deliver faster results. Singh is not the only economist to raise the red flag on economy. Will the government listen to sane voices?

ALI Chougule is an independent Mumbai-based senior journalist.