GDP GROWTH PLUNGES TO 4.5%
Context: The government has announced that the growth in the gross domestic product (GDP) in the July-September quarter has hit a 25-quarter low of 4.5%.
- Growth in gross value added (GVA) also dipped to 4.3% in Q2 of 2019-20 from 4.9% in Q1, and 6.9% in the Q2 of last year.
- The previous low was recorded at 4.3 percent in the January-March quarter of 2012-13
ACCORDING TO THE DATA RELEASED BY THE GOVERNMENT
- There is a sharp deceleration in the manufacturing, agriculture, and construction sector.
- The manufacturing sector has contracted 1% in the second quarter of the current financial year, compared with a robust growth of 6.9% in the same quarter of the previous year.
- GDP at Constant (2011-12) prices in Q2 of 2019-20 is estimated at Rs 35.99 lakh crore, as against Rs 34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent according to the National Statistical Office (NSO)
- Quarterly GVA at Constant (2011-2012) prices for Q2 of 2019-20 is estimated at Rs 33.16 lakh crore, as against Rs 31.79 lakh crore in Q2 of 2018-19, showing a growth rate of 4.3 percent over the corresponding quarter of previous year.
CAUSES BEHIND THE SLOW GROWTH
- The current slowdown in GDP growth — for four consecutive quarters — is because of a series of policy decisions.
- Two mega policy decisions — demonetization in November 2016 and the rollout of the goods and services tax (GST) in July 2017 — disrupted the Indian economy.
- Both the policies were aimed at greater formalization of the Indian economy, but the two struck a big blow to the informal sectors which employs the maximum number of the workforce.
- The policy disruption hangover still continues and is accentuated by the crisis in banking and non-banking financial sectors.
- This hit the small and medium scale businesses more adversely than expected in the wake of the collapse of Infrastructure Leasing and Financial Services (ILFS).
- Money just stopped flowing into the market. The net result was a huge job loss.
EFFECTS OF SLOW GROWTH
- The economy is growing but the rate of growth has slowed down, which is a huge setback for the country as it requires an accelerated growth to provide employment to millions entering the job market every year.
- A slowdown in growth rate would turn the population dividend into an unmanageable burden
JOBS AS THE REAL KEY TO GROWTH
- The estimated of job loss due to policy interventions is ranging from 40 lakh to 4 crore since demonetization.
- According to the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in July 2017 — when GST was rolled out was 3.4. It has been growing since then and for week ending August 25; it was at over 9 per cent.
- Jobs have been lost in huge numbers. Rural India has suffered more due to loss of employment.
- This shows in consumption pattern. Rural consumption shows greater declining trend than urban.
- Declining consumption or low demand forces manufacturing firms to cut down their output. Sustained low consumption rate leads to layoff in companies, closure of factories, showrooms etc. This is visible in every state of India.
- When the economy is spiraling down, investment pushes the growth figures up.
- But private investment is dismal in the country — at a 15-year low.
- The government, on the other hand, does not have enough money to invest.
- Private investment has declined in India on account of three main factors — low demand, policy interventions and global factors.
- The lingering US-China trade war has kept the global investors guessing about what could be a better and profitable investment.
- The impact is not limited to India only. This investment caution turned into a sort of investment paralysis due to uncertain Brexit deal.
- The budgetary provision for a super-rich surcharge on foreign investments added to the problem.
- The three factors combined to see an FII (foreign institutional investor) pull out from India to the tune of $2.2 billion in 10 months.
- At the same time, the Reserve Bank of India (RBI) largely adopted an inflation-centric policy leaving lesser amount with the bank to lend to the industry.
- While FIIs pulled out huge amounts of money from India and private investment was sagging, the government could not push its own money into market.
- The government was dealing with the non-performing assets of banks, the NBFC crisis and making sure that the fiscal deficit target is not breached as this would have cascading effect.
- Fiscal deficit constraints means the government cannot borrow money beyond a limit. This leaves a very little room for the government to invest.
This is the state of Indian economy right now.
- Latest policy announcements by the government including withdrawal of super-rich surcharge are likely to bring back investment and create jobs, and hence push demand for consumption.
- If that happens, it will give a fresh kick to the Indian economy.
QUESTIONS: What are reasons for the recent economic slowdown in India and do you think we are headed for a recession in the economy. (15 marks)