Blog Details

Battling India’s growth recession

• Data released by the government showed India’s GDP growth at 4.5%, marking the slowest expansion in 26 quarters. In gross value-added terms, the economy grew at 4.3%, compared to 4.9% in the previous quarter.
• Trade, hotels, transport and communication grew at 4.8 % in Q2 compared to 7.1 in Q1. Mining grew at 0.1 % in Q2 compared to 2.7 % in Q1, while manufacturing contracted by 1 % compared to growth of 0.6 % in Q1.
• A slowdown is being seen among major industries, like automobiles, diamond and textiles. Even Micro, Small and Medium Enterprises (MSME) are experiencing a continuous decline, which has led to layoffs of 3.5 lakh workers so far.
• The Central Bank has cut interest rates five times this year to boost growth, with monetary easing complemented by fiscal measures, including US$ 20 billion of tax cuts for companies. 

India’s economy grew at its all-time low pace in over past six years in the July-September quarter, mainly on account of weak manufacturing and a drop in exports due to a global slowdown. Gross domestic product (GDP) grew at 4.5% in the second quarter of FY20, marking the slowest expansion in 26 quarters. In gross value-added terms, the economy grew at 4.3% compared to 4.9% in the previous quarter. In the current GDP series, the lowest growth rate recorded was 4.3% in the fourth quarter of FY13. The growth rate for the second quarter of FY20 is the lowest since then. Are these signs of early recession or a phase of structural economic slowdown? Let’s try to explore some of the plausible reasons for this declined growth.

Source: https://www.ceicdata.com/en/indicator/india/real-gdp-growth (CEIC DATA)

Causes of the slowdown

The slowdown is attributed to several reasons including a stressed banking sector, GST Implementation, problems in the agriculture sector, NBFC crisis, industrial slowdown, slump in consumption expenditure and de-growth in exports. A slowdown is being witnessed among major industries, like automobiles, diamonds, textiles. Micro, Small and Medium Enterprises (MSME) are experiencing a continuous decline, which has led to the firing of 3.5 lakh workers so far. The US-China trade war is also impacting global growth, which has obvious repercussions for economies like India.

Private consumption has collapsed as consumers would want to save the cash in banks instead of spending it on consumer goods. The effect is more pronounced in the rural areas as the entire rural economy runs on cash. Due to rural distress, consumers are preferring to wait and save their cash instead of spending it on commodities.

On the other hand, with such a decrease in demand, the production and hence supply have also decreased. This has further reduced the cash flow present in the market, resulting in a vicious cycle, which has further amplified the effect of slowdown. Demand collapsing and supply bottlenecks mean that there is a broad slowdown across the entire value chain of the demand and supply dynamics. 

As a result of this, the companies are facing severe cash crunch. To solve this problem, they are laying off employees which is exacerbating the existing problem of unemployment. The fact that most Public Sector Banks or PSUs are saddled with high NPAs or Non-Performing Assets has resulted in them stalling loans. Instead they are trying to repair their balance sheets by seeking deposits and making provisions for bad loans. This further adds to an already dry cash flow in the economy.

The Agriculture sector is currently is on a new low today due to high input costs, low output cost and low investments by the government in this sector. The rates of savings and investment in the Indian economy have declined and the RBI report also says that the growth can be sustained by the ‘virtuous cycle’ of savings, investment and exports, which can be supported by a favourable demographic base. Finally, the fact that the whole world is facing a global economic slowdown is also an important reason for the slowdown faced by the Indian economy.

Sectoral trends

• Trade, hotel, transport, communication grew at 4.8 % in Q2 compared to 7.1 in Q1.
• The financial services sector grew at 5.8 % compared to 5.9 % in Q1.
• The agriculture sector grew at 2.1 % in Q2 compared to 2 % in Q1.
• Mining grew at 0.1 % in Q2 compared to 2.7 % in Q1.
• Manufacturing contracted by 1 % compared to growth of 0.6 % in Q1.
• Electricity and other public utilities grew by 3.6 % in Q2 as against 8.6 % in Q1.
• Construction grew at 3.3 % in Q2 compared to 5.7 % in Q1.

Ray of hope

The RBI cutting rates and banks lowering lending rates may help credit growth. But uncertainty in the jobs market and growing wariness among borrowers, can prevent this from happening. The Central Bank has cut interest rates five times this year to boost growth, with the monetary easing complemented by fiscal measures, including US$ 20 billion of tax cuts for companies. It needs to create a robust financial structure that can serve the needs and demands of growing nation.

Here the government may follow a Keynesian approach. It should increase public expenditure to spur demand. Investments need to be made in agriculture infrastructure, inputs, extension, marketing and storage and training. Furthermore, investment in skills, education and health, skilling, employment and quality education is possible should be another aim. It should raise public employment by filling all vacant sanctioned posts in the Central and State Governments, which would be around 2.5 million jobs. Also, a big push to start-ups and MSMEs is required. The liquidity crisis that started with IL&FS crisis, must be dealt with as soon as possible. The Indian economy has a huge potential and the current slowdown must be dealt with a strategic bottom-up approach.

Comments

  1. Reply

    The author is ?% right sharing his views on economy and industrial growth, now the government has to take the necessary action before it’s goes to worse. No wonder if the steps taken in last 5 years these are the results of economy and rescission.

Leave a comment

Your email address will not be published. Required fields are marked *

deneme bonusu casino 1xbet giriş canlı poker siteleri canlı rulet oyna sweet bonanza oyna casino siteleri