Monday, August 26, 2019

Why Indian Economy is slowing down and aggregate demand is decreasing?


What is obvious is the aggregate demand in the economy is decreasing. This is both in the high end sectors and in the consumer market too. People are losing jobs and not much option to get new jobs. The value of rupees is decreasing against dollar. . Non performing assets of banks are increasing. Foreign direct investment is decreasing.
In a nutshell all available economic data shows an impending economic crisis. The government seems to be still in a bravado posturing and many think Modiji will have a magic wand to solve the economic problems.
While there could be macroeconomic reasons for this, a cursory look at the ground realities can give a clue on what is happening.
Here are few of those factors observed on the ground.
In last October, I did a round of visits to at least ten shops in Adoor. They all said that the business was extremely dull just getting enough to pay rent and many big shops decreased the number of employees. This began in 2017 soon after demonizing adventure. And of course the Kerala flood made things worse for them.
Now look at the reasons the shop owners said:
1) Distress of farmers and farming sector.
The crash of rubber price affected the local consumers very badly. Because tens of thousands of people were surviving on rubber tapping. And like wise thousands small scale rubber planters ( who form 95% rubber farmers)' . I can very well understand this..As a small rubber farmers, we had a monthly income of around 30 thousands rupees. And two rubber tapping families survived on tapping our rubber and a retailer. In a nutshell my farm.supported not only my mother, but at least four more families.
We don't tap rubber anymore as it is net loss for us. So this means a total income of around 50 thousands rupees and in total GDP terms around 1200 USD is reduced.
This also.means people had less money to spend. So rights from tea shops, restaurants( I run one ) , mobile, recharge, clothes, bakery all affected. I have seen this happening in front of me
2) Real Estate price got stagnant and demand decreased.
As the income from cash crops got affected, many wanted to dispose land . But the demand to buy land decreased. This created a paradox. While the speculative market price of land looked higher, the real demand is lower. This resulted in stagnation of real.estate sector.
Those who have money got the ' tax scare ' and became very reluctant to invest. Because many middle-class and upper middle class people did not want to get the risk.of tax related harassment.
The other reason is due to the economic uncertainty, people are reluctant to take chance in land deals and real.estate in general.
Several of India's publicly traded real estate firms are in debt
This stagnation of real estate largely affected a whole section of people from.estate agents to other indirect beneficiaries got affected. This affected their purchasing capacity, slowing down the demand.
3) increase prices of goods and services , due to.GST plus other indirect taxes and increasing oil prices increased the cost and this higher cost of goods and services meant people limiting their choices and reducing the demand
4) Stagnation of wages .
If you look at data the wages are stagnant, and the prices have gone up. This affected the purchasing capacity of very large section of wage owners.
It has been pointed out that " Raising that 33.2% labor share to the developing-country average of 37.4% would put an extra $100 billion of annual spending power in the hands of Indian households."
5) Nervous about losing the jobs
The report of Centre for Monitoring of Indian Economy said India lost 11 million jobs in.2018.
The CMIE report showed that the number of unemployed has been steadily increasing in the country. The number of employed recorded in December 2018 was at 397 million, which is 10.9 million less than the figure of 407.9 million seen a year ago at the end of December 2017.An estimated 9.1 million jobs were lost in rural India while the loss in urban India was 1.8 million jobs. Rural India accounts for two-thirds of India's population, but it accounted for 84 per cent of the job losses," the report stated
Both in the IT sector and in the manufacturing sector, thousands are losing jobs. This has created nervousness among a large number salaried people in the private sector. So.many started saving more and spending less as they are preparing for potential hard times due to the jobs
6) Demonetization affected small scale enterprises, farmers and informal sector.
Most of the self employed, small scale entrepreneurs, and those in the informal sector deal in cash economy. This is also the case of marginal farmers. Many of them operate on loans ranging from few thousands to few lacks. They also operate on giving services for credit. The sudden demonizing shock.threw them out of their mode demand and supply cycle based on.cash economy and trust. But when there was a sudden reduction in money supply, they were affected badly with bad loans and difficult credit. This affected so.many resulting in effective loss of wage or job.
This too affected the aggregate demand.
So what we see now is the cumulative effects of various policies from.2012 onward. Modi came to power promising to solve all these problems and good governance. But failed to deliver and further worsened the situation..For a while it was concealed with data manipulation and rhetoric. Then economic questions were sidelined with new rhetoric majoritarian jingoism.
Now the economy is in a very vulnerable state with a potential disaster, the media managers and trouble shooter adopt a distraction strategy wherein news are created or cooked up to distract attention from an impending economic crisis around the corner.
The question is how long can the government put the troubled economy under the carpet.
JS Adoor

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