By Anjan Roy
In his monetary policy statement last week, the governor of the Reserve Bank had observed that the current slowdown appears to be cyclical. Maybe, but the slow down appears to have come full cycle. It began in the housing and automobile segments, which are capital heavy for the consumers. Now it is spreading to even the fast moving consumer goods (FMCG) sector, which is what is small change. Even stocks of soaps and sandals, biscuits and shampoos are rising. Why so? And apparently all of a sudden.
Several factors, not least the emphasis of the government to formalise the Indian economy through spreading the tax net, too benign inflationary behaviour in the last couple of years would have led to the loss of pace. Let us see how.
For the whole of last one year, the food prices inflation rate was very low. Sometimes these went into negative territory. As such, food grains price inflation has been very low now a days and food grains inflation is no longer an issue. It is the price of vegetables, fruits, potato, onions which have shown price volatility. But even most of these prices were ruling at low levels. Even during the summer months, when prices of food items traditionally showed steep upward curve, there had remained flat if not falling.
A low temperature inflation behaviour and stable prices had been hailed as achievement and the Modi government would ride on the back of it at the hustings. But now the chickens are coming home to roost.
The implication of low prices is that income of the farmers are sluggish. In many cases the farmers could not recover their costs from the prevailing prices and as a result farm products (like tomato or potatoes) were thrown on the roads instead of carrying them to the market.
To compound the misery there have been instances of crop failure in sporadic pockets in the country. Public memory is short. Remember the hue and cry raised last year about episodes of farmer suicides. They had taken crop loans before the season and failures of the crops meant insolvency. Many had chosen to commit suicide instead as the way of saving their families.
All these things in the aggregate meant that the rural incomes were under pressure. The farmers and those living in the rural areas did not have adequate returns in the last few years. When there is no income, who will go and buy a new motor cycle. From a decision to desist from buying a transport items, the households in the rural areas are cutting down their purchase of even such rudimentary stuff like buying an extra bottle of shampoo. When the bulk of Indians live in the rural areas, widespread income shortfall in the arm sector would inevitably have its impact on the overall level of demand. The lesson is that some retail price inflation is good as it shows the health of the economy. The Reserve Bank, as the custodian of the price line, should not be fastidious about it.
Equally, the government should not be too fastidious about tax evasion and spreading the tax net. Several issues are at play here. There is definitely a question of moral hazard and an effort at proving “holier than thou” stance.
Take for instance, the crack-down on parallel transactions in the real estate sector. Imposition of various information and counter-checks for real estate transactions had weeded out black money transactions. This is good and morally correct.
But along with this crackdown, the real estate prices have slumped. This is one of the reasons for the current collapse of the housing sector. The expectations are that prices of house bought today might not appreciate in the near future. That money which used to flow in the real estates have not found very effective alternative avenues.
Secondly, in the absence of appreciation in real estate prices, all current house owners psychologically did not have the comfort of large assets holding. In the absence of such a feel-good mind set, the current holders will not be in a frame of mind to splurge. They will not be encouraged to spend and this is the behavioural pattern of the large number of people irrespective of the fact whether they are willing to sell and book profit.
It is not the contention that the authorities should turn a Nelson’s Eye to large scale real estate transactions outside of tax net, but that some time and leeway should be provided for gradual adjustment to a new environment.
In fact, somewhat similar phenomenon had struck the Chinese real estate sector when speculative purchase of real estate properties were clamped down and people were prevented from buying a second or third or other homes. Seeing the downward spiral, the Chinese had withdrawn those restrictions on speculative property purchases.
Lastly, the current loss of pace of the Indian economy might be the delayed-action-fuse of GST. The GST framework has an inherent trend toward inclusion. All economic activity would tend to gravitate towards the tax net. Now, people who have been accustomed to paying no tax for ever, cannot be expected to produce under strict tax compliance. GST has been a disruptive development and the economy has to yet come up with it. Informal economic activity has been the sheet anchor of the Indian economy and the numerous small scale tiny and cottage units have remained happily outside of any formal tax net. These sectors have been somewhat thwarted, though surely not obliterated. They are in the process of adjustment.
One major criticism has been that jobs have not grown. How can them when the small-scale and tiny informal units do not feel confident and comfortable in a new macro-economic environment.
As a whole, these good intentioned measures have somehow or other have impacted adversely the “feel-good” factor in the economy and slow down is end-result of this mindset. Could be, that with a wink the government could convey a feeling of being somewhat accommodative. It should also do something to shore up the rural economy with large scale infrastructure creation for farm based industries like developing a nationwide reefer network for movement of farm products. (IPA Service)
