In Racine County, May sales dropped 29.3%, with real estate professionals selling 220 houses, down significantly compared to the 311 houses that were sold in

What is happening to the Indian economy? Should we be worried or relieved?

You should be worried. Why? Because recession is going to hit soon. Lets say its because of 60% Indian market and 40% Global factors.

Indian Factors :

GDP is calculated as GDP=Private consumption+ gross investment + government investment + government spending + (exports – imports). So, in short, private consumption and gross investment is low, government spending and investment is average, and export growth is slow. Most of the industries are suffering due to variety of reasons.

Markets are defined by demand and supply. In some cases, demand is not there like FMCG, Automobiles and some, where supply is getting interrupted like real estate, even though demand is there but unfinished project, bank defaults are hurting the real estate segment even more.

I’ll try and cover some of the points mentioned above here.

  1. Liquidity Crunch – After the fall of IL&FS and other bank frauds, the NBFC(Non-banking financial Companies) sector has taken a hit. NBFCs play an important role in meeting the rising demand for credit, loans, and other financial services. Customers include both businesses and individuals—especially those who might have trouble qualifying under the more stringent standards set by traditional banks. Thus, they kept supplying market with the money for expansion, upgradation etc. But with NBFCs not available and banking sector not financing deals, most small to mid level companies are not getting loans for CAPEX and OPEX. Hence, production is low, cost cutting and fired workers.
  2. Automobile – With changes in engines from BS IV to VI next year and also due to focus of government on electric vehicles, the demand has hit to an all time low. With more than Rs 25000 crores of inventory lying in warehouses, auto OEMs have stopped manufacturing new cars, and more than 3–4 lakh employees(contract + permanent) getting fired, the situation is very bleak for this industry. Even government response has not been very stimulating. Also, the banks are also stringent with providing auto loans, hence overall, demand is not there.
  3. Banks – Because of scams like Nirav Modi, Mallaya, Mehul Chokshi and other multi thousand crores, the banks are now focusing on NPAs and tighter process. They are not providing funds to even large corporations and are following very stringent procedure.
  4. Real EstateReal estate around India has taken a very bad hit because of demonetization and banking reforms like withdrawal of cash and scrutiny of Income Tax . Previously, real estate firms used to divert money to other project and other benami cash transactions, which they are unable to do and now, they dont have money to complete their projects. Take the case of Amrapali, JP Infra etc. More than 10 lakh home buyers are suffering. Real estate also impacts steel, cement and many other industries. So, impact on real estate is impacting all. And so far, government is distancing away from this issue.
  5. Demonetization – I dont know, if demonetization was good or bad for the country but it was definitely bad for small and mid segment companies and also for the unorganized sector which amounts to more than 70% employment in India. Small-mid tier segment and unorganized sectors works mostly on cash transaction and with DeMo it took a hit.
  6. Angel Tax – Angel tax is levied when a privately-held company raises funds at a rate higher than its “fair valuation.” Currently, India charges 30% in angel tax. Over the past several months, many Indian startups have received tax demands with high penalties from the income tax department. The current law presumes guilt and more often penalises the genuine investor and entrepreneur. This has caused irreparable damage to the startup ecosystem in India as angels are putting their money elsewhere and entrepreneurs are having a hard time finding funds.
  7. Tax on Foreign Portfolio Investors and High worth Individuals – On July 5, the finance minister proposed to increase the surcharge on income tax of individuals earning between Rs 2 crore (Rs 20 million) and Rs 5 crore (Rs 50 million) to 25% from 15% and a hike in surcharge to 37% from 15% on individual taxpayers making more than Rs 5 crore. This also included FPIs in some cases. This tax proposals in the Budget for FPIs and the super rich is spooking the market sentiment. Hence FPIs are withdrawing the money from Indian Market.
  8. Change in Technology – Indian IT industry is one of the largest blue collar job employers in India. Due to new technologies and automation, most of the industry is facing profitability issues, which is leading to job cuts.
  9. Private Consumption – Growth in India’s fast moving consumer goods (FMCG) sector is declining as lower spending in urban centres and slowdown in rural growth crimp consumption. Value growth in the FMCG space in the April-June quarter of 2019 dropped to 10% from a year ago. It was also the third consecutive quarter of slowdown. Tough market conditions, backed by lower spending by households, and concerns over a spike in inflation rate have hurt this industry.
  10. Exports and Imports – Export sectors that showed positive growth in the last july 2019 included chemical, iron ore, electronics, marine products and pharmaceuticals. However, shipments of some key sectors recorded negative growth, including gems and jewellery (- 6.82 per cent), engineering goods (- 1.69 per cent) and petroleum products (- 5 per cent). Cumulatively, during April-July 2019, exports dipped 0.37 per cent to $107.41 billion, while imports contracted by 3.63 per cent to $166.8 billion. So exports are not growing at a pace as they should be and imports like oil and gold, being a factor of global market changes from time to time.
  11. Other Reasons – From manufacturing to services to agriculture to industrial growth is seeing very slow growth and even negative in some cases. Those who say GDP is better, its a faulty figure as shown in media. With none of the sectors growing,except for government expenditure and some large multinationals, there is no case wherein GDP of India is even close to 6.5 . Some of the top most economist in India and worldwide are pointing to the flaws in current government functioning. Most of the micro and macro economic factors are overlooked, i guess.

With BJP coming to power in 2019 with absolute majority, a better budget supporting different industries was expected, but this budget was nothing close to what is required in current scenario. Currently, no factor in GDP calculation is looking strong.

Global Factors – Global factors leads to volatility and affects demand, supply and borrowing in international market. Some of the major global factor include US-China trade war, US Iran face-off, China slowdown, Hong Kong protests and Brexit to name a few. All these factors leads to investors pulling their money out from developing economies and investing in safe products like gold or US dollar. Trade imbalance, volatile market, contracting economies are some of the other effects. Businesses are impacted worldwide.

All these factors and impending recession is cause for worry. Hopefully, Indian government now focus more on economy and works quickly to support the market.

Note : This is as per my understanding. Looking forward for more discussion on the same.

Edit 1 : Thanks Anubhav Verma for the edit.

Edit 2 : Thanks guys for the overwhelming response. Really appreciate you taking your time out and reading my answer. But i would like to point out that it was not my intention to scare anyone, but one should be aware of whats happening. I am no economist, but i read and from that i get information. Perception differs from person to person. And as far as our country is concerned, we have stood, time and again, against the most difficult scenarios and will do it again.

Edit 3 – FM Nirmala Sitharaman announced that section 56(2) (viib) of income tax act 1961 would not be applicable to startups registered under DIIPT. Thanks Gaurav Fatwani for the edit. FM has announced some good initiatives but the issue will be with consumer confidence.

Cheers

Thanks,

Shraiyans