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Reviving demand is key to India’s economic recovery


Date: 03-06-2020
Subject: Reviving demand is key to India’s economic recovery
By Sudhir Valia

With the entire nation under lockdown for over two months, demand has slumped. Almost every sector, be it in services or manufacturing, has reported a drastic plunge in demand. In April, the automotive industry reported no sales whatsoever. Some of the biggest engines of economic growth, such as realty and construction, hospitality, aviation, all reported virtually no activity. Apart from healthcare and essential services, the only industry that kept working was agriculture. This is the saving grace because the largest chunk of manpower in India is employed in the agricultural sector. We have seen the recession of 2008 where millions were unemployed, companies were reluctant to invest, and factories had fallen silent. Consumer demand was stagnant. But, in no time, the demand was gushing. A handful of companies were doing exponentially better than their competitors. They enjoyed runaway growth, premium pricing, and extraordinary customer loyalty. Companies started growing, profits were robust, and customers were loyal because these companies continued business.

We must not over-react to the present situation and take stern decisions that eventually break our businesses. It is very important to take a balanced view, without haste. It is important to be in business to ensure continuity, and we should retain our employees.

So, how will the economy soar once again after the pandemic, when the crisis is deeper than the one in 2008?
The economy is based on demand; Other than the necessities, demand is based on perception. The government has tried to pump liquidity in to the market; however, it is perceived that demand hasn’t come back. Demand will come back only when people feel that prices will go up, or they assume that they are getting an opportunity that they should encash les it is missed.

Now, with the government pushing for liquidity and asking banks to lend, will this not bring the economy back on track?
Liquidity will help industry to manufacture, but if industry doesn’t see demand, it won’t produce.

Demand generation

The government has been coming up with a lot of measures; however, we must agree with the fact that for an economy to revive, demand should be there. Reforms should be framed in such a manner that the industries are supported, so that employment continues. If employment continues, purchasing power will be sustained.

It is cyclical. Money needs to rotate in the market, which is crucial. Once the government starts ‘give and take’, there are immense possibilities for reviving the economy, and the government will earn more revenue than it has to give up. Banks are averse to lending in this gloomy economy. The government, in consultation with banks and industry, should structure relations in such a manner that it is lenient for all and in benefit of general public.

RBI has created a perception that it will support mutual funds, and the government has given an assurance by way of guarantee to banks. Here, banks and the government together have to work for the same goal.

The Insurance Regulatory and Development Authority (IRDA) is aggressively thinking of reviving its credit insurance business. This will definitely help the banks, which will be safeguarded and, thus, encouraged to lend. The government is making a lot of effort, but money is not reaching the people on the street and purchasing power isn’t going up.

Consider our two major industries: construction/real estate and automotive.

Construction/real estate: Banks must form a scheme for real estate where they give loans for 35-40 years, with 2-3 years moratorium. Here, RBI support will be required for giving loans for 35-40 years as there will be no matching deposits that banks will have. Currently, interest rates are already very low and there is no need to reduce. Based on a ready-reckoner rate, banks should give loans. In affordable categories, banks should not ask for more papers, but must get contribution from homebuyers or assurance from developers that banks will not be left in the lurch. Only pre-approved projects should be funded so that banks do not take any haircut. However, bank loans on EWS category should be considered as priority sector lending. The government will get GST on input material. Per square feet, at least Rs 300 will go towards GST. There is a huge unmet need in this segment, and across India, 100 crore sq-ft constructions, which translate into 20 lakh houses, will be consumed in the next 2-3 years. The government also will earn additional 5% GST on sale of these flats, which will again be about Rs 300-400 per sq-ft. If the government gives time to homebuyers to pay GST of 5% within five years in five equal instalments with 7% interest, then it will be a great help to homebuyers. Such a scheme should be made available for

6-9 months. In case homebuyers are unable to repay to the bank, then a bank can monetise the asset, or a developer will compensate to the bank. The real estate sector has a lot of NPAs. If the government pushes work, banks will be able to monetise their outstanding receivables. People in the retail segment generally do not default unless they are jobless or face any other critical/unavoidable reason, as in India self-respect in the community is valued more than anything else.

Automotive: Similarly, in the automobile industry, there can be new bank loans with margins of 25-35%, and banks must give loans up to Rs 2.5-3 lakh. It will help sales of small cars, two-wheelers and light commercial vehicles pick up. In this case, car manufacturers must give FLDG (first loss default guarantee) or will buy-back a vehicle from banks, where banks will not make any loss. In such a case, automobile manufacturers and banks both are protected. Easy loans will help people buy vehicles as public transport will likely be avoided. Automobile manufacturers should develop attractive schemes to push demand.

If the government gives a waiver of tax on payment of interest for purchase of a house or a vehicle, it will be widely accepted by the borrowers and will propel demand.

Labourers have migrated, and in such a scenario the revival of real estate seems gloomy. A lot of action has been taken and labour laws are getting reformed. Now, 12-hour working shifts should start. Everyone must contribute towards economic development, and extra labour must be provided with a suitable pay package. Moreover, the government must come out with an order that all the workers have to report on a particular restart date or within 30 days of a restart date. If they do not report, action can be taken.

The real estate and the automobile industry have more than 350 upstream and downstream linkages. Any revival here will release a cascading stream of benefits in all other interlinked segments. As a result, myriad employment and entrepreneurial opportunities will be generated, and this will be key in driving a faster turnaround of the Indian economy. The prime minister’s ambitious vision of a self-reliant India, or Atmanirbhar Bharat, will then become a ground reality sooner rather than later.

Everyone has to work to overcome the economic crisis. The government is a saviour, but it alone cannot solve all the problems of the people. All of us Indians need to contribute towards this.

Source:- financialexpress.com

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