A lot of people are shaking their heads these days, talking about the state of the economy. You will hear them talking about automobile sales being down and about Parle cutting 10,000 jobs as demand for biscuits is down. People are concerned about a slowdown in ‘consumer demand’. So what does this mean and why are we talking about it?
First, what is an economy? It is basically the money generated and used in an area by making and selling products and services.
What is consumer demand? It is the demand for goods and services in an area – it is how much stuff consumers want to buy. People like to spend their money when they have enough saved up, and when they are pretty sure their jobs are safe.
What is an economic cycle?
Usually, economies of countries grow over time, but go through the economic cycle. The ‘expansion’ phase is characterized by a period of high growth, where people and companies are feeling good about the future and want to spend more and invest in their business, often borrowing to do so. During such a phase, money is readily available at a low rate of interest. These and other factors lead to increased demand and production. There are more jobs for people then as well – to make and provide these goods and services.
This is measured as GDP (Gross Domestic Product) – the value of goods and services produced by a country.
At some point, the economy peaks and there will be a ‘contraction’ or reduction in production and spending. Demand falls, and the country will be making more than it can consume. At this point, if the GDP reduces, or contracts, over a period of two consecutive quarters (or over 6 months), it is said that the country is in a recession. This phase is characterized by people losing jobs, a tightening of belts, where people cut back on how much they spend on certain things that are ‘discretionary‘ – those that they can do without.
Once, the system is corrected for the factors that led to the recession, another ‘expansion’ phase starts and the cycle goes on.
OK so where is India in this economic cycle right now? The last global recession was about 10 years ago, and since we know that the economy goes through cycles, economists (those whose jobs it is to think about the economy) are wary of being in one soon.
Got it! So what is this about biscuits and automobile sales? India’s economy has been watched very carefully since it has been through a few shocks.
Rainfall has been very spotty over the last few years, leading to a crisis for many famers in India. This is important as currently 14% of the country’s GDP is from agriculture. This industry also accounts for 50% of the jobs in India (Source: investindia.gov).
The Indian government carried out a controversial process of ‘demonetization’ in November 2016. With this, certain bank notes were suddenly no longer accepted, and people, particularly those in rural areas, suffered from a sudden reduction in cash they had. This was done to try and take ‘black money’ out of the system.
The Indian government introduced different GST (goods and services tax) rates on things that are being made and sold. Suddenly some things became more expensive, and this had an effect on how much consumers were willing to spend as well.
There was also a financial crisis where institutions who were funding businesses that did not have the strongest fundamentals were not able to get back their loans. This shocked the financial system.
Consumer demand in India has been reducing over the past couple of quarters, and so has the GDP. This is worrisome. Consumers are not spending as much on things they don’t feel are necessary, so are putting off things like buying that new car, or even Parle biscuits. Parle is feeling the pinch and announced that it is thinking of closing a factory and cutting upto 10,000 jobs. They are not the only ones, this is just an example. Many global companies have set up production units in India and are selling products here as well. They are providing jobs to people here in India. Lower consumer spending will threaten these jobs as well. And so unemployment may increase. Interestingly, India’s unemployment rate is already pretty high. It is the highest it has been in the last few decades!
What about the global economy? There is a slowdown in consumption in other countries as well. There are many reasons for this, including the trade war between the US and China that has increased tariffs and the price of many products. Uncertainty about the state of Brexit has also contributed to the change in consumer spending.
So what can we do in this slowdown? Governments and economists are brainstorming on how to make things right.
India’s Finance Minister, Nirmala Sitharaman, has just introduced a bunch of new tax cuts for businesses, in order to encourage companies to produce more goods. This is welcome news for companies and investors! However it doesn’t address the problem of lower consumer demand. Stay tuned to see what happens next on this.
For you and I, it is important to remember that the best way to weather a recession is to be careful with your finances. Be positive and remember that there is a cycle! This too shall pass.
Written by: Biyash Choksey and Sunaina Murthy