NoidaGurgaonBengaluruHyderabadBhopalChandigarhDehradunIndoreJaipurLucknowPatnaRanchi

Reviving sentiment could be key to battling economic slowdown

The Indian economy has seen worse, but arresting worsening economic sentiment is crucial. How bad are things right now? A long-term comparison of key economic indicators shows that things have been worse.

Labourers work inside an iron factory on the outskirts of Jammu. The deceleration in the real economy is coming at a time when economic sentiment is already stretched too thin. (Reuters)

High-frequency economic indicators suggest that the current economic slowdown is likely to worsen. The core-sector industry index grew just 0.2% in June. Indias biggest car maker Maruti Suzuki reported a 36% annual decline in car sales for the month of July. The stock market has gone into a tailspin after the budget was unveiled on July 5.

How bad are things right now? A long-term comparison of key economic indicators shows that things have been worse.

GDP first. It has been going down for four consecutive quarters beginning June 2018. If the June 2019 GDP growth numbers are lower than the 5.8% value for March 2019, then we would have had a decline in GDP growth for five consecutive quarters. Since June 1997, there have been only two instances of GDP growth declining for five consecutive quarters, between March 2008 and March 2009, and March 2011 and June 2012. To be sure, the growth rate in the current phase is still higher than what it was during those periods. However, it is also a fact that the veracity of current GDP numbers is the subject of a controversy.

There is evidence to suggest that aggregate demand both foreign and domestic is stalling. Export growth and the core sector industry index support such as a prognosis, where a short-lived recovery seems to be reversing itself. Still, the performance of both the core sector and exports have been worse on several occasions in the past.

See Chart 2: Export growth and core-sector index

One reason why people feel as bad as they do about the economy may be sentiment.

The deceleration in the real economy is coming at a time when economic sentiment is already stretched too thin. The Reserve Bank of Indias consumer confidence index clearly shows this. The index seeks responses on the current general economic situation and what people expect it to be a year from now. The future expectation is a good metric of peoples belief in the ability of a government to handle the economic situation, especially during a crisis.

See Chart 3: General economic situation current and future perception

These two measures were moving in tandem (a declining trend) under the second United Progressive Alliance (UPA) government that bowed out in 2014. There was a sharp recovery in future expectations after the 2014 results gave a clear majority to the Bharatiya Janata Party (BJP). Both the present and future indices were improving until November 2016. This is the month when demonetisation happened. The current situation index turned negative after that, even as future expectations remained stubbornly positive. There was a brief spike in the current perception index in March this year (just before the elections), but it collapsed again in May. This has been accompanied by a big fall in future expectations as well.

The consumer confidence index trends convey an important point. The present government has had a very long rope in terms of being expected to deliver on the economy. The lack of any coordinated policy response to deal with the current, and perhaps worsening, economic slowdown is affecting future expectations adversely.

Expectations play a very important role in present economic decisions. If people do not expect things to improve, they will postpone or worse, cancel investment and spending decisions. This will feed into the slowdown and trigger a vicious cycle. There is an urgent need to prevent economic sentiment from plummeting further, even if it entails things such as the government appearing pro-business, rationalisation of revenue targets, or even letting go of the fiscal consolidation roadmap.

Good luck to Shiv Sena: BJP ditches bid to form government

6 wickets for 7 runs: Deepak Chahar bags best-ever figures in T20I cricket

Former CEC TN Seshan, known for poll reforms, dies at 86

It will be a Sena chief minister if Udhhav Thackeray says so: Sanjay Raut

Cyclone Bulbul kills 9 in Bengal, Odisha; PM Modi offers help to two states

15-year-old Shafali Verma breaks Sachin Tendulkars 30-year-old record

Pakistan to allow Nawaz Sharif to travel abroad for urgent medical treatment

BJP slams Navjot Sidhu for praising Pak PM Imran Khan at Kartarpur event

Bigg Boss 13 highlights: Vishal Singh is new wild card entry

Bigg Boss 13: Tehseen is out of the show and Ayodhya verdict is the reason

Saif reveals whether he feels jealous of Kareenas success when films flop

Bigg Boss 13: Biased host Salman Khan trends after he defends Siddharth

Full-body scanners to return to Delhis IGI airport for third round of trial

Lawyers to resume strike today, claim failure of talks with Delhi police

Ayodhya verdict: Hindu groups eye Trust, Sunni Central Waqf Board to take call on plot

No decision on Maharashtra govt formation, BJP core group meets again

PM speaks to Mamata Banerjee over cyclone Bulbul, assures all possible help

Dont interfere in Kashmir, stop eyeing Punjab: Amarinder Singh to Pak

Five key reasons behind Supreme Court ruling in Ayodhya verdict

Copyright © HT Media Limited All rights reserved.

Reviving sentiment could be key to battling economic slowdown

Ayodhya verdict: Hindu groups eye Trust, Sunni Central Waqf Board to take call on plot

Good luck to Shiv Sena: BJP ditches bid to form government

Pay rent of Rs 34 lakh or we will evict you: PWD serves notice to MP IAS officers association

KBC-like test to enter over 300 govt schools in Madhya Pradesh