Updated on 31 August, 2019
India's economy is witnessed slow growth rate in 5th quarters consecutive. Recently the government of India has released data about the economy which indicated the lowest GDP growth rate (6.8%) in the last 5 years. The agriculture growth rate is negative (0.1%) and the growth rate in the manufacturing sector is just 3.1% in the first quarter of the financial year 2019.
Nature of slowdown
- The automobile sector of India is one of the largest in the world and accounts for over 7.1% of India's gross domestic product (GDP). And the contribution of the real sector is roughly 10 percent of the country’s GDP. Contribution of the Manufacturing sector is nearly 20 percent of the country's GDP.
- Flight of capital has been showing an increasing trend in recent years. Flight of capital in economics occurs when assets or money rapidly flow out of a country, due to an economic consequence.
Reasons slowing down
- The slowdown in the Indian economy is contributed by structural problems and cyclical downswing. The structural change represents the fundamental changes occurring in the basic features of the economy over a long period. Structure of the economy thus means the occupational structure, sectoral distribution of income, industrial pattern, composition of exports, saving- GDP ratio, etc.
- The cyclical economic slowdown is a part of the business cycle having its peaks and troughs. The economy will be moving in cycles with periods of peak performance followed by a downturn and then a trough of low activity. The liquidity crisis in the economy could be a cyclical issue.
- According to the RBI report, current economic conditions result in the cyclical downswing, with several structural problems which need to be addressed. The structural factors contributing to the slowdown is evident from the fact that the successive rate cuts by the Central Bank have not yielded the desired results.
- External Factors
- Trade war: In trade conflicts, there are no winners. Too much protectionism ultimately constricts global growth.
- Devaluation of the yuan: The depreciation of the yuan will make Chinese goods more competitive in the global market, which in turn implies, that India would lose its market for exports. The threat of greater emerging market risk as a result of the yuan devaluation led to increased volatility in Indian bond markets, which triggered further weakness for the rupee. This would increase India’s trade deficit and current account deficit and thereby put pressure on the Indian currency.
- Iran Sanctions: It will make crude oil import costlier for India and this will impact India’s trade deficit too.
- Depressed Global Sentiments: It discourages the investor to invest money in the economy.
- Internal Factors
- Implementation of Goods and Service Tax (GST) and Demonetization a structural reform which naturally had an adverse impact on the economy. The Reserve Bank of India (RBI), in its annual report for 2018-19, has said the lack of domestic demand is holding back the economy. There are still structural issues in the land, labor and agricultural marketing indicate that this crisis is mainly structural and real wages, both rural and urban, have been decreased between 2012 and 2018. This happened due to the very low growth rate in a non-agricultural job compared to the earlier period.
- Liquidity Crisis: Liquidity crisis led to a crisis in almost all sectors including financial and auto.
- NBFC Crisis: The slowdown in the economy was further aggravated by the NBFC crisis triggered by the IL&FS default.
- Gross fixed capital formation is down to levels before FY05. This comes down to 5 percent of the first quarter of the current fiscal. As income growth is lower, consumption is compressed or only maintained at the expense of savings.
Recently steps taken by the government to revive the economy
- High Unemployment rate: Government data revealed that the unemployment rate is 45 years high.
- Manufacturing jobs fell by 5.7% between 2012 and 2018. Construction jobs that account for most of the jobs that rural migrants take-up rose by 96.5% compared to 8% recently; services 18.6% vs 13.4%.
- All the sectors, especially the auto sector, is passing through a crisis like situation due to the declining sales. The declining sales and piling inventories are forcing companies to cut down production. The cutting down of production can have repercussions in the job market. Sales of passenger vehicles dropping to a nearly two-decade low and mass layoffs across several industries.
- Industrial growth rate dropped to 1.7% in January 2019 against a growth of 2.6% in December 2018.
- Bank Credit also slows downed because the bank has to make higher provisions for bad loans.
- Bank Recapitalisation: Immediate infusion of Rs 70,000 crore into banks to boost their liquidity and lending capacity of banks by Rs 5 lakh crore while housing finance companies would get up to Rs 30,000 crore with a view to reviving the real estate sector.
- Banks Merger: 10 public sector banks to be merged into four. The consolidation of public sector banks will give them scale. This will enhance their risk appetite.
- Stimulus package: Rollback of enhanced super-rich tax on foreign and domestic equity investors. Exemption of startups from 'angel tax',
- FDI policy reforms: The changes in FDI policy will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment, and growth. FDI up to 100% is permitted on the automatic route in most sectors. The government allowed 100 percent FDI in coal mining and contract manufacturing, eased sourcing norms for single-brand retailers and approved 26 percent overseas investment in digital media.
- Budgetary Support: The government’s support for the Central Plan is called budgetary support. The BS includes the tax receipts and other sources of revenue raised by the government.
- Insolvency and Bankruptcy Code (Amendment) Act, 2019: The Code provides a time-bound process for resolving insolvency in companies and among individuals. Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
- SEBI FDI Relaxation Rules: Sebi has come out with rules for the merger of foreign portfolio investment (FPI) and non-resident Indian and overseas citizens of India. This will bring a single regime for foreign investors. This will also regulate NRI and person of Indian origin fund inflows.
- Other Major Steps:
- To bolster consumption, banks have decided to cut interest rates, a move that would lead to lower EMIs for home, auto and other loans.
- Plan to encourage scrapping of old vehicles and removal of the ban on government departments in buying new petrol and diesel vehicles.
- In a bid to give a fillip to job-creating Micro, Small and Medium Enterprises (MSME), pending GST refunds would be done within 30 days.
- Violation of Corporate Social Responsibility (CSR) obligations would not be treated as a criminal offense and only as civil liability.
- Setting up of an entity for credit enhancement for infrastructure and housing projects, a task force to finalize the pipeline of infrastructure projects and simplification of Know Your Client (KYC) procedure to improve market access for foreign investors.
- Income tax notices and orders would be issued through a centralized system to curb harassment.
- Long Terms Measures
- Structural Slowdown will need deep-seated reforms. The Government should bring more reforms inland market. The government must provide land to private according to their requirement. Labor market reforms are a must for accelerating growth.
- Boost to Rural Economy: Government is providing ₹90,000 cr toward an income support scheme for small farmers and another ₹25 trillion to increase farm productivity. The government in its interim budget had also promised to provide ₹60,000 crore for rural employment guarantee scheme.
- Short Term Measures
- The revival of consumer demand and private investment. Banks need to pass on past rate cuts to borrowers at a faster pace by linking the lending rate to repo rate
- Need for countercyclical package: Government should provide sectoral incentives and confidence-building steps to the private sector. The Government should also focus to boost infrastructure investments and provide GST relief to specific sectors including the automobile sector, that could boost demand. Steps should also be taken to improve the ease of doing business.
- The government should follow fiscal readjustments to boost growth without accumulating public debt while supporting private investment in infrastructure. Private investment is the 'key driver' that drives demand, creates capacity, increases labor productivity, introduces new technology, allows creative destruction, and generates jobs.
- Monetization of Assets: This includes the strategic sale of loss-making and defunct public sector enterprises (PSEs) sitting on large tracts of land that could be commercially utilized. Profit-making PSEs such as ONGC, NTPC etc, should sell some of their non-core assets, including manufacturing units and surplus land to realize funds that could be invested in new projects where private investment is not forthcoming.
- Ease of FPI norms: This could give a boost to the overseas investment in the country which is an important source of economic growth and development in India. These altered norms will make the regulatory framework more investor-friendly for FPIs and a multidimensional approach is needed to solve the issues of FPIs and causes of outflows.