India’s Economic Slowdown & 5% GDP: What’s the Big Deal?

The current situation is in fact a BIG DEAL with predictions of a global recession in 2020. The urgency for sound macroeconomic policies and their implementation is vital in maintaining stability in the economy while building on its capacity to tackle a future recession.

By Viji Rajesh

Photo by rupixen on Unsplash

A country’s Gross Domestic Product (GDP) has long been used as a foremost component to measure the well-being of the economy. GDP comprises of all the market values of goods and services produced in an economy in a year. It gives an estimate of a society’s standard of living. Any macroeconomic policy of the economy revolves around maintaining the balance in GDP growth, unemployment and Inflation. Economic slowdown can be defined as a general decline in the economic activity which is commonly driven by widespread decline in the consumption. Recently, Indian economy reported its weakest GDP growth of 5% in April-June Quarter of 2019 since 2013 (MOSPI, 2019). This has been intensified by the slowdown in the automobile industry, financial crisis in the non-banking finance companies (NBFCs) and tightening of lending norms.


The entire financial system is facing a high stress situation resulting in economic slowdown. There is widespread insecurity among the individuals concerning the money transactions in the financial sector. The economy is facing liquidity crisis wherein lenders or banks have stopped funding businesses, resulting in a situation where they have to survive on cash. Niti Aayog Vice Chairman emphasized that the prevalent uncertainty has resulted from initiatives such as Demonetisation, Goods and Service Tax and Insolvency and Bankruptcy Code (Kumar, 2019)


After enjoying growth rate of more than 7% for the last decade, the first quarter of 2019 the economy grew by 5%, the slowest rate in the past 20 quarters (MOSPI, 2019) . Manufacturing sector has shown a declining growth of merely 0.6% in the first quarter of 2019 compared to growth of 12.1% in first quarter of 2018-19 (MOSPI, 2019). Even with the low inflation of 3%, private spending has slowdown with the decline of the automobile sales and liquidity crisis in the financial sector. The aspiration of becoming $5-trillion economy by 2024-25 is only conceivable if the GDP grows at by 8% p.a. with the inflation rate assumed to be around 4% p.a. (Moody's , 2019)


GDP Growth Rate of India

The deviation in the GDP growth rate is contributed by its components i.e. consumption, investment, government spending and exports. The sector such as households, businesses and government played a contributing role in the economic slowdown of 2019


How low domestic spending affecting the well-being of the economy?


The current slowdown is contributed by the weak spending of the economy. The ingrain problem for reduced consumption is low spending power especially in terms of household income which is related to the employability. High unemployment rate, slacking automobile sales, liquidity crisis and slowdown in other sectors such as real estate has gained power in reducing the growth rate of India.


Unemployment

With unemployment rate of 8.4% where the youth of the population is facing the slumped situation (CMIE, 2019). India’s unemployment doubled in the past two years. The youth that contributes to the 40% of the India’s labour force have an unemployment rate of more than 32% (CMIE, 2019). The unemployment has affected the young graduates of the country where major portion of the educated lot lack the skills required for the jobs available. The manufacturing sector and service sector has always been the largest employer that absorb the Indian youths with decent income opportunities. However, currently the manufacturing sector is growing at the 0.6% that resulted in the downsizing the labourers in that sector. Does this show initiatives such as Skill India and Make in India 2014 which aims to increase both employment and growth of manufacturing sector has not been able comprehend to its targets in past five years?


Source: Down to Earth | Centre for Monitoring Economy (CMIE)

Auto Sales

The contraction of the auto sales to nearly 30% resulted from high insurance costs, rise in GST to 28% from 18% and tightening liquidity in the non-banking finance companies (NBFC) sector. The urban population has hit by the difficult job market and in rural India, the farm output was not satisfactory. Therefore, the purchase of the automobiles is going at decreasing rate that led to piling up of the inventory and creating distress situation for the auto dealers. The industry requires stimuli to help revive consumer demand and conversions.

Source: Data compiled from various sources by Economic Times, 2019

Real Estate

Apart from Auto industry, Real estate prices have been in all time low for years. As per Liases Foras, a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019. This means that builders are building new houses at a faster pace than people are buying them. The real estate sector has forward and backward linkages with 250 ancillary industries (Kaul, 2019). So, when the real estate sector does well, many other sectors, such as steel and cement to furnishings, paints, etc. will perform satisfactorily.


With the current scenario, the increase in urban labour participation along with shrinkage in the economy increased the unemployment rate. Two thirds of consumer spends on the services, financial services, investment and insurance, reduction of demand eventually leads to lower domestic production and low prices causing deflation in the country. Deflation forms a vicious cycle of unemployment and lower demand and this leads to recessions and depressions in the country.


How does distrust in the financial system affecting the capital flow?

The volatile conditions of the economy trigger the inflow of domestic and foreign investments. Liquidity crunch in the non-banking finance companies (NBFCs) and tightening of lending norms intensified weak spending behaviour and overall slowdown (Kaul, 2019).

Lending Norms

The trustworthiness of the bank towards the individuals and the companies has gone down after several bank scam and the liquidity crunch. Lending to the micro and small industries has remained flat at 0.6% while lending to big industries has improved by 6.5%in 2019 against 0.9% 2018. While lending to big industry is important, it is the micro and small industries which tend to create the bulk of any jobs in any economy, as they grow bigger.

Non-Banking Finance Companies (NBFCs)

Due to indiscriminate lending during 2009-14 increased the non-performing assets (NPAs) post 2014 which reduced the ability of banks to do fresh lending. This led to the increase in credit growth by the shadow banks of 25%. The NBFCs could not manage this high loan growth leading to defaults by some of the large entities triggering slowdown in the economy eventually (Hindu, 2019).


What actions Government is taking to tackle the current situation?


In order to boost the sluggish economy, government of India is considering option of utilizing the RBI’s excess reserve of Rs. 1.76 trillion to provide fiscal stimulus. The measures announced by the Finance Minister Nirmala Sitharam included (Singh & Nag, 2019):

1. Infusion of Rs. 70,000 crore to public sector banks to address the slowdown of automobile industry.

2. Merging of public banks for global coverage lead to high current and savings account ratio and a high lending capacity.

3. Reducing the tax on foreign and equity investors

4. Excess reserves used for balancing the shortfall in tax revenues of Rs. 1 trillion


Additionally, the Reserve Bank of India had reduced its repo rate by 25-35 basis points 5.40 from 6% for the fourth consecutive time. These rate cuts have a positive effect on the borrowers as the lending rates of the commercial banks tend to reduce. Borrowing means induced spending and investment in the country. However, weak hiring and financial distress blunt the effectiveness of monetary stimulant.


Effect on the States


Regarding the regional condition, the slowdown is progressive in North and West zone especially Haryana, Madhya Pradesh, Uttar Pradesh, Maharashtra and Assam. Reduced government spending with heavy rainfall and even floods in some states affected the crops and overall output in most Indian markets. Decline of FMCG products sales in rural areas was 37% of total spending in this sector. The rural growth leapt to 10.3% in the April-June quarter of 2019, down from 12.7% in 2018 (Nielson, 2019).


Does another Global Recession approaching down the line?


Economic slowdown is inevitable in the current context given the economic indicators. In addition, global distress furthermore elicits the spending and investment patterns of the Indian economy.

An intensifying trade cum currency conflicts instigating alarm for a global recession. Economies like China, US, Britain and Germany are in the brink of recession due to swelling protectionism and growing trade barriers. Escalation of US-China Trade war, Slowing US growth, Chinese debt crisis, long recession in Germany and Brexit are fueling uncertainty in the global financial market and driving towards imminent recession and financial crash similar to the 2008 crisis. Moreover, climate change, war and natural disasters that is prevailing across the world has ensured monetary and financial instability and questions overall security of the country.


Monetary stimulus in the country can help revive the auto industry and increase spending in the economy. With harvest season and festivities approaching in the second and third quarter of the financial year the spending would increase to certain extent in the country. Injecting money supply in the economy can bring out of the cyclical slowdown for the short term. The mistiming of certain policies such as high insurance for automobiles and high GST elevated the slacking economy. The uncertainty of political discourse of the country creates a sense of tension in the overall development.


The current situation is in fact a BIG DEAL with predictions of a global recession in 2020. The urgency for sound macroeconomic policies and their implementation is vital in maintaining stability in the economy while building on its capacity to tackle a future recession.


References

  1. Business Today. (2019, August 23). Current economic slowdown 'unprecedented', says Niti Aayog's Rajiv Kumar. Business Today.

  2. Business Today. (2019, July 18). These states are leading India's economic slowdown. Business Today.

  3. CMIE. (2019). Unemployment Rate 2019. Centre for Monitoring Indian Economy Pvt. Ltd.

  4. Dhasmana, I. (2019, August 24). Moody's cuts India's GDP growth to 6.2% for 2019 amid economic slowdown. Business Standard.

  5. Economic Times. (2019, August 30). India's GDP growth slows to 5% in April-June 2019 . The Economic Times.

  6. Hindu. (2019, August 31). GDP growthdown to 6-year low in Q1 of 2019-20 financial year. The Hindu.

  7. Kaul, V. (2019, August 14). 15 ways to define India’s slowdown. Mint.

  8. Kumar, R. (2019, August 23). Mindmine Summit 2019.

  9. Moody's . (2019, August 23). Moody's revises its growth forecasts for 16 Asian economies. Moody's Investors Service.

  10. MOSPI. (2019). Press note on Estimates of Gross Domestic Product for the First Quarter(April-June) 2019-20. National Statistical Office (NSO); Ministry of Statistics and Programme Implementation.

  11. Nielson. (2019). INDIA FMCG GROWTH SNAPSHOT. Nielson India.

  12. Singh, S., & Nag, A. (2019, August 28). Rs. 1.76tn bonus from central bank gives centre options on budget. Mint.

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