With the US now paying less to borrow for 10 years than two years, for the first time, the US yield curve — the curve formed by the interest rates of US treasury bonds of various maturities — had turned upside down during the first fortnight of August sending jitters across stock markets. For, this seemingly obscure event is however, considered by the investors across the markets as the important forecaster of recessions as it did presage all the earlier US recessions since the second World War.
Yield curve is essentially a reflection of the distilled wisdom of the global investors of every hue. When the economic outlook turns dim, investors tend to move towards government debt to remain safe. But when long term yields fall below the short-term debt, the rates of which are more closely linked to the interest rates set by the central banks, investors, foreseeing a further downturn fear about fresh rate cuts. Manifestation of this disturbing inversion is attributed by some to the US Fed’s slowness in lowering interest rates. Amidst these turbulent waves, analysts wonder, if the central banks of the global economy’s super powers, who have already spent much of their firepower, have the wherewithal to stall any future recession. While a few others, downplaying the inversion, predict that the US economy would avoid a recession.
Nevertheless, markets are becoming highly pessimistic more because of the ongoing trade war between the world’s two economic super powers, the US and China. Over it, the contraction in the German economy, which is the powerhouse of the EU, is adding fuel to the fire. Indeed, the cost of Germany’s fiscal obstinacy is already spilling troubles to the Euro countries while some spill overs are likely to the rest of the world too. One therefore fears that the increasing political risk, currency risk, credit risk and the growing nationalism across countries, are all cumulatively portending a synchronised global recession.
Against this disturbing global macroeconomic environment, the news about Indian economy too are raising alarm bells. The growth in GDP during the first quarter of 2019-20 slowed to a six-year low of 5% compared to 8% recorded in the corresponding quarter of the last fiscal. Worryingly, every sector reported negative figures: growth in manufacturing sector slowed to a dismal 0.6% as against 12% of last year, agriculture slipped to 2% as against 5.1% of the previous year and the nominal growth tumbled down to a 17-year low of 8%. Car sales have crashed to 20-year low and car manufacturers are laying-off people. As a share of GDP, private consumption in current prices has fallen by 1% as compared to Q1 of 2018-19. In the same vein investment at the current price level has fallen from a peak of 35% of GDP to a low of 30%. Over it, with the capacity utilisation of companies being placed below 80%, all this is certain to drastically effect not only the balance sheets of the corporates and in turn their loan repaying capacities but also the revenues of the government, which in turn will affect its fiscal concerns. One estimate indicates that the fiscal-deficit has already reached a level of 77.85% of the budget-estimate.
No doubt, the prevailing adverse global conditions do have a say on the current slow-down. And over it, the current slowdown being both cyclical and structural calls for an urgent push to growth from the government. Sustainable growth can be ensured only when government undertakes structural reforms that encourage fast-tracking of infrastructure investments, attracting global value chains that are likely to shift from China, leveraging sectoral strengths and rising domestic demand by improving liquidity in the market.
As against this, the Economic Survey hopes to rise investment through foreign direct investment, which in the present scenario of global slowdown is perhaps hard to realise. Further, in the backdrop of falling consumption and dwindling exports, even private investment from domestic players may not be forthcoming. Here it is important to bear in mind that the monetary policy and its rate cuts alone cannot effectively address the structural factors. There are thus no easy answers to the current slowdown.
So, what next? The only hope is that if government, taking a calculated risk, eases its fiscal concerns and gives a ‘fiscal boost’ to infrastructure development, it may create stimulus for growth in domestic consumption. This in turn shall encourage private investment. Simultaneously government, without pinning all its hopes on the RBI and its monetary policy for it has already exhausted all its ammunition, must launch such structural reforms that deliver results faster. Mere cosmetic touches such as bank mergers will do no good to the slowing economy. On the other hand, such measures might prove costly in the short run, particularly in the present context of all around fall of growth indices. For, banks being bogged down by merger-challenges likely to be less enthusiastic in maintaining steady flow of credit to businesses. In short, what therefore needed from the government is: an aggressive investment drive in infrastructure through innovative structural reforms and a gentle nudge to domestic consumption.