Causes for the Present Slowdown in the

Indian Economy
The Effect of Demonetization

Indeed, Demonetization can be said to have contributed too much of the slowdown as the Double
Whammy of demand collapsing, and supply bottlenecks mean that there is a broad slowdown across the
entire value chain of the demand and supply dynamics.

Thus, what we have is a situation wherein cash has dried up leading to a slowdown in the economy.

One must also take note of the fact that it is not only private consumption and small enterprises causing
the slowdown.

Indeed, the Big Corporates are as much to blame since they are drowning in debt that they accumulated
during the Boom Years of the first decade of the 21st century.

It is also a fact that this has contributed to a freeze on investment by industrial houses and corporates
who are now paying down the debt or postponing debt repayments to ensure that their present cash flow
is sufficient to remain in business.

Too Much Debt

Added to this is the fact that most Public Sector Banks are saddled with high NPAs or Non-Performing
Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise
repairing their balance sheets by making provisions for Bad Loans.

Indeed, absent recapitalization of such banks by the government, one might very well see a vicious cycle
wherein bad debts and demand collapse lead to no lending and no fresh investment in addition to any
consumption.

The cycle has to be broken somewhere, and this is where the Government and the RBI or the Reserve
Bank of India have to take concerted action.

Rollout of GST

Fourth, the fact that the rollout of the GST or the Goods and Services Tax on a nationwide basis has led
to the slowdown cannot be denied.

Indeed, GST has hampered the small businesses more than Demonetization by forcing them to withhold
inventory until they migrate to the GSTN or the GST Network and become compliant with the numerous
rules and regulations that are part of this tax.

It can be said that the implementation of GST is also flawed thereby exacerbating some of the factors that
have contributed to the slowdown.
Global Slowdown

It is not these factors alone, and the most important factor is that there is also a global economic
slowdown that is happening and given the fact that India is a net commodity exporter, there has been a
slump in the volumes of exports.

Apart from that, the global slowdown has also been accompanied by a retreat of globalization which has
resulted in FDI or Foreign Direct Investment being only in the areas of speculative finance and distressed
assets purchases rather than into investments that help the Real Economy.

Thus, it can be said that ongoing global headwinds also have contributed to the slowdown in the Indian
Economy.

Retreat of Globalization

Hence, what the slowdown means for professionals and fresh graduates is that they would be finding it
harder to land jobs as well as see their salaries rise year on year basis. In addition, the policies of the
Trump Administration have contributed to a decline in the number of students and professionals going to
the United States and added to this, Brexit uncertainties have compounded the situation.

It looks as though that the combined effect of all these factors means that the Indian Economy is likely to
remain in the doldrums for some time to come.

Ride out the Storm

Lastly, the slowdown is also part of a longer-term structural shift wherein the Economy is shifting gears
from the high investment era to a low investment era as well as a transition from being cash-driven
economy to a digitally enabled economy.

Indeed, this can be seen most in the Real Estate Sector that has come to a grind in recent months and
hence, has also contributed to the slowdown. All in all, all the factors have caused a Perfect Storm for the
Indian Economy, and there has to be a time lag before one can reasonably and realistically expect a
turnaround.

To conclude, the best option now for all stakeholders would be to Ride out the Storm.
Cyclical or structural? Decoding the
nature of India's economic slowdown

What is a cyclical slowdown?

A cyclical slowdown is a period of lean economic activity that occurs at regular intervals. Such slowdowns
last over the short-to-medium term, and are based on the changes in the business cycle.

Generally, interim fiscal and monetary measures, temporary recapitalisation of credit markets, and need-
based regulatory changes are required to revive the economy.

What is a structural slowdown?

A structural slowdown, on the other hand, is a more deep-rooted phenomenon that occurs due to a one-
off shift from an existing paradigm. The changes, which last over a long-term, are driven by disruptive
technologies, changing demographics, and/or change in consumer behaviour.

Consumption:

“Private consumption, which contributes nearly 55-60 per cent, to India’s GDP has been slowing down.
While the reduced income growth of households has reduced urban consumption, drought/near-drought
conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on
rural consumption,” said analysts at India Ratings and Research, Indian arm for Fitch Group. The private
final consumption expenditure (PFCE) has slumped to 3.1 per cent in Q1FY20, the weakest level since
Q3FY15

Dissecting India’s slowdown

A slowdown in consumption demand, decline in manufacturing, inability of the Insolvency and Bankruptcy
Code (IBC) to resolve cases in a time-bound manner, and rising global trade tension and its adverse
impact on exports are some of the factors affecting India’s growth, analysts say.

Savings:

Savings by household sector – which are used to extend loans for investment -- have gone down from 35
per cent (FY12) to 17.2 per cent (FY18). Households, including MSMEs, make 23.6 per cent of the total
savings in the GDP.

“Since households are the only net savers in the economy, their savings are major contributors towards
investment. These savings have now reached to a level which isn’t adequate to fund the government
borrowings… This will keep interest rates elevated,” says Sunil Kumar Sinha, principal economist, India-
Ra.
Investment:

Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy, too has declined
from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data show. Similarly, in the private sector,
it has declined from 26.9 per cent in 2011 to 21.4 per cent in 2018.

The household sector, which is the biggest contributor to the total capex in the economy, invests nearly 77
per cent in the real estate sector, which has lost steam since demonetization.

The way out?

Analysts say under the current macro environment, monetary policy seems to be less effective than fiscal
policy as ‘improper transmission mechanism’ fails to pass on benefits to the real economy.

The Reserve Bank of India (RBI) highlighted a broad-based cyclical downturn in several sectors, including
manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture,
and called for counter-cyclical actions in terms of monetary and fiscal policies, along with deep-seated
reforms for the structural slowdown.

Further rate cuts, increase in fiscal spending, deviation from fiscal deficit target, and boost in consumption
sentiment are some of the suggestions by analysts to arrest the downtrend. On its part, the RBI has cut
the repo rate by 110 basis points so far in CY19 to 5.4 per cent – its lowest level since 2010.

“There are structural issues in land, labour, agricultural marketing and the likes, which need to be
addressed,” the central bank said in its Annual Report for 2018-19.

IMPACT ON REAL ESTATE SECTOR

DUE TO SLOW DOWN IN ECONOMY
The real estate sector is a critical sector of our economy. It has a huge multiplier effect on the economy
and therefore, is a big driver of economic growth. It is the second-largest employment-generating sector
after agriculture. Growing at a rate of about 20% per annum and this sector has been contributing about
5-6% to India’s GDP. Not only does it generate a high level of direct employment, but it also stimulates the
demand in over 250 ancillary industries such as cement, steel, paint, brick, building materials, consumer
durables and so on.

The Indian real estate industry has been on a roller coaster ride since 2005. Consequent to the
government’s policy to allow Foreign Direct Investment (FDI) in this sector, there was a boom in
investment and developmental activities. The sector not only witnessed the entry of many new domestic
realty players but also the arrival of many foreign real estate investment companies including private
equity funds, pension funds and development companies entered the sector lured by the high returns on
investments. The real estate sector has been riding through many highs and lows since then. The
industry achieved new heights during 2007 and early 2008, characterised by a growth in demand,
substantial development and increased foreign investments. However, by mid-2008, the effects of the
global economic slowdown were evident here too, and the industry took a ‘U’ turn. FDI inflow into real
estate dropped significantly and what had emerged as one of the most promising markets for foreign
investments experienced a downturn.

FINANCIAL SUPPORT TO THE SECTOR

In the Financial Years 2007-08, 2008-09 and 2009-10, the housing and real estate sector attracted FDIs
of 8.9%, 10.3% and 11% respectively, of the total FDI in India. However, the financial year 2010-11 saw a
mere 6% FDI in this sector. The year 2010 saw the Indian real estate sector spring back into action after
the gloom and recessionary pressures experienced in the aftermath of the global downturn. The focus on
‘affordable housing’ helped the sector tide over the financial crunch it had witnessed. There is no doubt
that the sector holds huge potential to attract FDI in its various segments. However, progress is possible
only with the joint efforts of both the industry and the Government. On the one hand, the industry should
work towards increased transparency, clear land titles, improved delivery and project execution while on
the other hand the Government must provide fiscal incentives to developers to build low cost and
affordable housing for the masses and also review the existing FDI guidelines for investment and
development in Indian real estate in order to increase the flow of foreign capital into the sector.

BOOSTING R&D IN REAL ESTATE

The Government must provide incentives to the public and private sectors to take up R&D activities for
new building materials and technologies so that the industry can deliver low cost, affordable, sustainable
and environment friendly housing and building structures.

GOVERNMENT REGULATIONS AND CHANGES REQUIRED

The Government of India vide Press Note No. 2 of 2005, permitted FDI up to 100%, under the ‘automatic
route’ in townships, housing, built-up infrastructure and construction development projects. The main
reason for opening up the real estate sector to 100% FDI was to bridge the huge shortage of housing in
the country and to attract new technologies in the housing sector.

The original FDI guidelines issued vide the above press note attracted large amounts of foreign funds to
the Indian real estate sector however, subsequent amendments to the FDI policy relating to real estate,
have created unwanted apprehensions and confusion in the minds of global investors thereby affecting
FDI inflows adversely.
Further, lack of consistency in rules relating to development of SEZs, increased monitoring of the sector
by regulatory agencies, tightening of rules for lending to the real estate sector and increase of key rates
by the RBI several times during the last one year, have arrested the growth of the sector. There is a need
to streamline government policies and introduce reforms to boost the real estate sector.

THE CHALLENGES

The key challenges that the Indian real estate industry is facing today are:

 Lack of clear land titles,

 Absence of title insurance,

 Absence of industry status,

 Lack of adequate sources of finance,

 Shortage of labour,

 rising manpower and material costs,

 Approvals and procedural difficulties.

The Indian real estate sector has traditionally been an unorganised sector but it is slowly evolving into a
more organised one. The sector is embracing professional standards and

Transparency with open arms. The major established domestic players in the sector are DLF, Unitech,
Hiranandani Constructions, Tata Housing, Godrej Properties, Omaxe, Parsvanath, Raheja Developers,
Ansal Properties and Infrastructure and Mahindra Lifespace Developers Ltd to name a few. International
players who have made a name for themselves in India include Hines, Tishman Speyer, Emaar
Properties, Ascendas, CapitaLand, Portman Holdings and Homex.

THE ROAD AHEAD

India has huge potential to attract large foreign investments into real estate. With real estate reaching a
point of saturation in developed countries and the demand and prices falling, global real estate players
are looking at emerging economies such as India for tapping opportunities in real estate. Indian real
estate will stay attractive due to its strong economic fundamentals and demographic factors. Moreover,
there is a high level of global uncertainty looming over the developed and developing nations of the world.
While developed economies are still struggling to regain their growth momentum, developing countries
including India and China are expected to grow at a reasonably high rate. Investments in Indian real
estate will fetch higher returns for investors as compared to other global markets. In the coming years, the
opportunities in the real estate sector will attract more global players to India and hence will help the
industry to mature, become more transparent, improve management and adopt advanced construction
techniques
 IMPACT ON SERVICE SECTOR DUE
TO SLOW DOWN IN ECONOMY

Introduction

The services sector is not only the dominant sector in India’s GDP, but has also attracted significant
foreign investment flows, contributed significantly to exports as well as provided large-scale employment.
India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport,
storage and communication, financing, insurance, real estate, business services, community, social and
personal services, and services associated with construction.

Market Size

The services sector is the key driver of India’s economic growth. The sector has contributed 54.17 per
cent of India’s Gross Value Added at current price in 2018-19*. Net service exports stood at US$ 60.25
billion in April-December 2018 (P).

Nikkei India Services Purchasing Managers' Index (PMI) stood at 50.2 in May 2019. The expansion in
services activity was driven by boost in capacity and demand along with favorable public policies.

Investments

Some of the developments and major investments by companies in the services sector in the recent past
are as follows:

 Leisure and business travel and tourism spending are expected to increase to US$ 234.4 billion
and US$ 12.9 billion in 2018, respectively.

 India’s earnings from medical tourism could exceed US$ 9 billion by 2020.

 Indian healthcare companies are entering into merger and acquisitions with domestic and foreign
companies to drive growth and gain new markets.

Government Initiatives

The Government of India recognizes the importance of promoting growth in services sectors and provides
several incentives in wide variety of sectors such as health care, tourism, education, engineering,
communications, transportation, information technology, banking, finance, management, among others.
The Government of India has adopted a few initiatives in the recent past. Some of these are as follows:

 Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Central Government
increased incentives provided under Services Exports from India Scheme (SEIS) by two per cent.

 Government of India is working to remove many trade barriers to services and tabled a draft legal
text on Trade Facilitation in Services to the WTO in 2017.

The fastest growing services sector is now hitting speed breakers. This is what the bank credit data to the
services sector indicates if one looks at last six-year numbers. The total bank credit to services sector has
grown at a compound annual growth rate (CAGR) of 10 per cent in the last six years to Rs 24.15 lakh
crore. The overall growth numbers look comfortable, but some of sub-sectors are witnessing a slowdown
in the credit demand.

Unlike manufacturing sector that hogs the limelight, the services sector does not get enough attention.
Jobs generated by the services sector are not in proportion to its share in the gross domestic product
(GDP), which is over 50 per cent.
The credit to shipping sectors shows a steep decline. This worst-affected segment shows the gross credit
by banks declining to Rs 7,700 crore in 2018-19, down from Rs 9,900 crore six years ago.
Similarly, the credit to tourism, hotel and restaurant is also in negative as compared to six years ago. The
credit outstanding currently stands at Rs 39,000 crore whereas it was Rs 39,200 crore six years ago.
Computer services is yet another area that hasn't grown in the last six years. It has moved from Rs
17,600 crore to Rs 18,500 crore.
Two big segments - transport and commercial real estate - are also in the grip of a slowdown. In case of
commercial real estate, the credit has grown at a CAGR of little over 4 per cent from Rs 1,54,400 crore
six years ago to Rs 2,02,000 crore. This segment is likely to see further slowdown in funding as banks as
well as NBFCS are withdrawing from the real estate market. The money-market credit via commercial
paper and bonds is also not easily available.
The credit to transport operators has grown at a CAGR of 7.37 per cent from Rs 90, 400 crore six years
ago to Rs 1, 38,500 crore.
The declining credit in the services sector mirrors the general slowdown in the economy. The services
sector growth in the GDP has already moderated to 7.5 per cent in 2018-19 from 8.1 per cent in 2017-18.
In fact, the first economic survey of the second-term of the BJP-led NDA government also pointed out that
there is a deceleration in services segments such as tourism, trade, hotels, transport, communication,
public administration and defense. The overall GDP has already plunged to 6.8 per cent in 2018-19. The
outlook for 2019-20 is also not very encouraging. The Reserve Bank of India has reduced the growth
forecast for FY20 to 6.9 per cent in its monetary policy. Recently, a leading credit rating agency CRISIL
had also cut the FY20 growth forecast to 6.9 per cent.