Indian Economy Slowdown | According to the RBI it has been officially stated that our country is going through an economic slowdown. It gives arise to many questions in our minds i.e., Is India Facing Economy slowdown? What are the reasons for Indian Economy Slowdown? Is India’s Economy failing?
Although RBI stated that it is cyclical in nature and not a structural slowdown. In its monetary policy review earlier this month, the RBI cut its growth projection for FY20 to 6.9% from its June forecast of 7%, citing weak domestic economic activity and a global slowdown amid trade tensions. We need to dive deep into this topic.
|What is cyclical slowdown? A cyclical slowdown is a period of lean economic activity that occurs at regular intervals. Such slowdowns last over the short-to-medium term and are based on the changes in the business cycle. |
What is structural slowdown? A structural slowdown, on the other hand, is a more deep-rooted phenomenon that occurs due to a one-off shift from an existing paradigm. The changes, which last over a long-term, are driven by disruptive technologies, changing demographics, and/or change in consumer behaviour.
Source: Business Standard
Source: PIB (As per Economic Survey of India)
The above chart reflects the GDP of India for past years and projection till 2020 according to the Economic Survey of India 2018-19. However, we are failing to achieve so.
Our economy has not recovered from the man made blunders of demonetisation & a hastily implemented GST… I urge the govt to put aside vendetta politics & reach out to all sane voices to steer our economy out of this crisis: Former PM Dr Manmohan Singh #DrSinghOnEconomicCrisis pic.twitter.com/83cBJWHay9— Congress (@INCIndia) September 1, 2019
Economists said the Indian Economy Slowdown is cyclical but deep-rooted and some structural reforms will be needed to ensure that growth gets back on track. When asked to suggest structural reforms to revive the Indian economy, the former PM said five points require immediate attention:
1. Rationalisation of GST, even if it leads to loss in revenue in the short term.
The GST system current rates are 5%, 12%, 18% and 28%. On top of the 28% slab a cess is levied on automobiles, luxury, demerit and sin goods. Because of this we have seen the slowdown in the automobile sector too. GST needs to be cut down to give industries some breathing space and revive the employment.
Paradox of lowering tax, A report by Kotak Institutional Equities had earlier estimated that a 10% GST cut automobile across the board could cost the government Rs. 45,000 Crore in a year.
Government is getting money from other sectors and dividends from RBI has increased tremendously. So, a cut in tax would not hurt a lot and may end up reviving the economy.
Transport minister Nitin Gadkari, while speaking at the 59th Annual Convention of the Society of Indian Manufacturers (SIAM), said he would urge the finance minister to pay heed to the industry’s concerns, which led to a rallying of auto stocks. Recently, the GST rate of electric vehicles has been cut to 5% from 12%. Find out more about this in the article: Is India ready for Electric Vehicles?
A promise by the government that goes far back to 2015, that is a cut in corporate tax can be proven as a relief for corporates and enable them in hiring more. Yesterday, our Finance Minister Sitharaman announce tax cut for new plants to lure MNCs looking beyond China. We need to see how it pans out.
2. Focus on increasing rural consumption and reviving the agriculture sector. He said government can take clues from Congress manifesto, which lays down several measures to free up agriculture market.
Former PM Dr Manmohan Singh said on the rural distress that “Farmers are not receiving adequate prices and rural incomes have declined. The low inflation rate that the Modi government likes to showcase comes at the cost of our farmers and their incomes, by inflicting misery on over 50% of India’s population.”
Where UP mills alone owe over Rs 11,000 crore, Punjab millers yet to pay Rs 989 crore to sugarcane farmers, while those in Gujrat and Bihar have an outstanding of Rs 965 crore and Rs 923 crore respectively. In total sugarcane arrears have touched a mark of Rs 18,958 crore. If this amount goes to the farmers, they can consume them in their development, buying equipment, tractors etc. This will boost the production in the rural sector.
“Moreover, the delayed onset and skewed distribution of the southwest monsoon rainfall may pose downside risks to crop production and to rural consumption demand,” the RBI said. “This is already evident in a sharp contraction in sales of motorcycles and tractors by 8.8% and 14.1%, respectively, during Q1:2019-20.”
Moreover, it needs to be clubbed with increasing funds in various rural schemes like PM Kisan Yojana, MGNREGA etc.
3. Liquidity crisis in India needs to be addressed. He said that not only public sector banks but NBFCs are also suffering.
Business uncertainty, solvency and liquidity worries are growing. Market funding and liquidity funding crises are resulting in an unprecedented liquidity gridlock in trade and industry. This liquidity crisis, along with deep structural weaknesses in the ecosystem, has further triggered an unprecedented economic conundrum. The risk of systemic events has increased.
According to the economists, demonetization, GST framework and the damage caused by the Chinese imports is to be blamed. Spill-over effects of demonetisation followed by GST have resulted in an unintended consequence of acute liquidity crisis. Under these ‘illiquidity’ conditions, many firms attempt to conserve liquidity and increase their precautionary cash balances, which sets off a spiral in falling payment volume.
Read about What is NBFC Crisis? To the point coverage: The Indian NBFC Crisis
4. Revive major job-generating sectors such as textile, auto, electronics and subsidised housing. He said easy loans need to be provided for this purpose, especially to MSMEs.
Many of these sectors are directly linked to the second and the third point that is Rural Distress and Liquidity Crisis.
During the interview, Singh explained how the slowdown among MSMEs is a prolonged affair which started in 2016 due to demonetisation. He also pointed out flaws in GST, which further crippled the MSMEs that are the backbone of multiple sectors.
A slowdown in steel consumption and contraction of both imports and domestic production of capital goods also indicated a slowdown. India’s external sector is also vulnerable due to risks from global developments, especially the downturn deepening, uncertainty over international crude oil prices and the volatility of capital flows.
Spill-over effects of massive unscrupulous Chinese imports need to be understood. The Make in India strategy needs to be synchronised with planned phasing out of illegal/under-invoiced imports along with spurring of domestic capex and capacity. Apart form this, we need to focus more on reviving the sectors in our country by reviving the demand and manufacturing.
5. Government needs to identify new export markets opening due to the ongoing trade war between US and China.
Last but not the least, Manmohan Singh also advised the government to recognise new export opportunities that arise out of the trade tussle between the US and China. During the interview, Manmohan Singh said a new export roadmap could be beneficial for India. Manmohan Singh also signalled that the government must find opportunities to attract private investments. Whereas, India is making its stronghold in this area, we still need to go a long way to gain out of this trade war.
RBI said,” reviving consumption demand and private investment has assumed the highest priority in FY20. This may involve strengthening the banking and non-banking sectors, a big push for spending on infrastructure and implementation of much-needed structural reforms in the areas of labour laws, taxation, and other legal reforms, which will also enhance ease of doing business in pursuit of getting out of Indian Economy Slowdown and fulfilling the vision of India becoming a $5 trillion economy by 2024-25.
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