The rain has stopped. You step out of home to run a few errands. On the way, you find 500 note lying on the ground. You pick it up and put it in your trouser pocket, thinking you’ll donate it to the local charity. But you give in to temptation as soon as you cross the local book shop and buy the latest bestseller for 500. The bookseller is an alcoholic and uses the money to buy his stock of alcohol for the day. The liquor shop owner takes the 500 and walks across to the local cinema and buys the ticket for the latest movie, featuring his favourite heroine. He also buys some atrociously priced popcorn and a soft drink. The cinema owner has to go attend a wedding at the other end of the town and he gives that very 500 note to a taxi driver, given that his driver is on leave.

What’s happened here? The movement of the initial 500 has made everyone better off. The initial 500 has been spent four times and has generated 2,000 worth of economic activity. In that sense, the first 500 contributed 2,000 to the Indian gross domestic product (GDP). The same wouldn’t have happened if you had taken the 500 and deposited it in the bank or simply kept it in your pocket.

GDP, in the conventional sense of the term, is defined as the “measure of all the goods and services produced inside a country”. Nevertheless, as John Lanchester writes in How to Speak Money: “GDP can be thought of as a measure not so much of size… It measures the movement of money through and around the economy; it measures activity.” The example shared above (which is inspired from a similar example in Lanchester’s book) shows precisely how economic activity adds to the GDP. One man’s spending is after all another man’s income, and the income can be spent again. So, the cycle is supposed to work and add to the economic activity and the GDP.

It is this activity that has been slowing down in India, since the beginning of 2019. The GDP growth during January to March 2019 slowed down to 5.8%. Looking at economic activity in the period April to June 2019, it is safe to say that the GDP growth would have slowed down further during the period.

The GDP of an economy is the sum of private consumption expenditure, investment, government expenditure and net exports (exports minus imports). There are many high-frequency economic indicators which tell us about the state of each of these four inputs that form the GDP. Let’s look at a series of 15 economic indicators to see how the economic activity during the period April to June 2019 has slowed down.

The consumption matrix

Consumption is the most important part of the Indian economy, given that it forms around three-fifths of the Indian economy. And any slowdown here is bound to affect the overall economy. Except for perhaps retail loans given by banks, there is a contraction in all other parameters which measure consumption in different ways.

Domestic car sales: During April to June 2019, car sales fell by 23.3% in comparison to the same period in 2018. This is the biggest contraction in quarterly sales since 2004 (that’s how far back the quarterly data in the Centre for Monitoring Indian Economy database goes). A slowdown in car sales negatively impacts everyone from tyre manufacturers to steel manufacturers to steering manufacturers etc., when it comes to the backward linkages that car manufacturers have. As far as forward linkages are concerned, many auto dealerships are shutting down or shrinking. At the same time, the vehicle loans growth has slowed down to 5.1%, the slowest it has been in five years.

Two-wheeler sales: These have not been as badly hit as car sales. Between April and June 2019, two-wheeler sales contracted by 11.7%. This is the biggest fall since October to December 2008, when two-wheeler sales had contracted by 14.8%, in the aftermath of the start of the financial crisis. In fact, even mopeds are not selling, with their sales down 19.9% between April and June 2019 (In 2018-2019, a total of 880,000 mopeds were sold, suggesting there is still good demand for them).

Tractor sales: A good indicator of rural demand, tractor sales during April to June 2019, fell by 14.1%, the highest fall in nearly four years.

Naveen Kumar Saini/Mint
Naveen Kumar Saini/Mint

Housing sales: As per Liases Foras, a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of 7 from March 2018, when the number was at 1.2 million. This means that builders are building new houses at a faster pace than people are buying them. The real estate sector has forward and backward linkages with 250 ancillary industries. So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too. This is something which isn’t happening currently. The fact that real estate prices haven’t gone up in years makes people feel less wealthy and as a result spend less.

Bank retail loans: This data point goes against the trend. During April to June 2019, the retail loans of banks grew by 16.6% in comparison to the same period last year. During the same period last year, they had grown by 17.9%. There has been a marginal fall in growth. Housing loans form more than half of the retail loans—they grew by 18.9% during the quarter against 15.8% last year.

How does one explain the fact that housing loans are growing and so is the number of unsold homes? A possible explanation for the fact is that people are now buying homes from investors who had bought many homes between 2003 and 2012, instead of buying directly from a builder. To that extent these are not new homes and hence, cannot create the kind of economic activity that the building of a new home can.

Other than home loans, credit card outstanding grew by 27.6% between April and June 2019, against 31.3% in April to June 2018. Again, a marginal fall at best. This also explains, why every time you tell someone there is a slowdown, they reply, but the malls and restaurants are packed. Credit cards are used by a certain section of the population and at least, when it comes to them, they haven’t slowed down on spending on small ticket items.




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