This might be getting repititive, but there’s no getting away from it. India’s economy is on its way down – with no sign of recovery anytime soon. It has now been revealed that corporate investments were down by almost 60% the year of demonetization – something from which the economy never fully recovered. The fast moving consumer goods (FMCG) sector has also been badly hit, with the iconic Parle-G set to lay off thousands.
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Demonetization happened back in 2016, but its effects can be felt even today. Investments declared by companies that year declined by almost 60%, a new report now claims.
“A report submitted last year by a panel set up to propose new direct tax laws found that investments disclosed by companies declined nearly 60% in the year of demonetisation, an article in The Hindu on Thursday said. As a percentage of the country’s Gross Domestic Product, corporate investments were merely 2.7% in 2016-’17, as compared to 7.5% in the preceding year.
According to Arbind Modi’s report, investments by companies were 15% of the GDP in 2010-’11, followed by 10.5%, 10.2%, 9.8%, 9% and 7.5% in subsequent years. They fell to 2.7% of the GDP in 2016-’17.”
The FMCG sector – one of the most resilient of industrial sectors – is also feeling the pinch. Hardy products like Britannia and Parle-G’s low-price biscuits are showing a sharp drop in sales.
“The tepid quarter results of biscuit-maker Britannia clearly shows that the economic slowdown has hit categories as basic as biscuits. Varun Berry, managing director, Brittania, pointed out that consumers are not willing to buy even a Rs-5 pack of biscuits. Now, Parle Products, makers of the iconic Parle-G biscuits, says that Parle-G is the worst hit. The country’s most favourite biscuit has been de-growing and if it continues, the company would be forced to lay off as many as 10,000 people working across its various factories.”
According to Mayank Shah, category head of Parle products, this can be directly traced back to the woes of GST. [Quick recap: The Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and services. This law has replaced many indirect tax laws that previously existed in India. It came into effect from 1st July 2017.]
“Biscuits are divided into two categories – there are biscuits above Rs 100 per kg and biscuits below Rs 100 per kg. The ones below Rs 100 were earlier exempted from excise duty, there was lower tax (Parle-G, Marie etc fall in that bracket). In the GST era, they clubbed both the categories together, and imposed 18 per cent tax, which is not fair. The government had promised that it would correct it but unfortunately nothing has happened. We were forced to take a price hike, as a result of which the demand dipped…” he said.
So, what now?
According to experts, going back to a manufacturing economy may be the only way out of this mess. India’s gradual shift to a mostly service-based economy may have hurt job creation more than earlier realized.
“It’s naïve to assume the current slowdown is a cyclical one. Instead, it is more structural in nature and therefore needs a radical policy shift, or else the problem will only get worse in future.
India, despite being a developing economy, has adopted a service-led growth strategy by bypassing the industrialisation effort, with the share of services at 54 percent of the economy.
Economists call this phenomenon the ‘missing middle’ – a scenario where growth in manufacturing and industry with their ability to absorb large scale labour is missing, and jobs tend to be concentrated in either highly skilled service-driven industries like IT or financial services or in farms with very low productivity.
This has left India incapable of coping with an impending demographic wave, increasing the risk of the economy falling into a low income trap with scores of jobless youth. This is already beginning to hurt us and the current slowdown is partially attributable to this phenomenon.”
Keep your eyes on this space. We’ll keep you posted.