A slowdown means that the pace of the GDP growth has decreased. Countries like India and China are currently faced with an economic slowdown. It means the production and earnings of these economies are not growing at the same pace as, say, last year. A situation in which GDP growth slows but does not decline. For example, if GDP goes from 5% growth to 3% growth, an economy is experiencing a slowdown. Most analysts do not consider a slowdown to be a recession, but unemployment may rise and productivity may decline.
An economic recession signifies a drop in the Gross Domestic Product (GDP). The GDP is the total value of all the goods and services produced or created in a country in a year. When this value falls, the country’s economy is said to be in recession. It means that the country is producing and earning less than what it did, say, six months ago. An economic recession is marked by low consumer spending because people lose confidence in the growth of the economy. This decrease in the demand for goods and services, in turn, leads to a decrease in production as companies reduce the output to match the demand. The GDP must decline for two consecutive quarters for it to be called recession.
India’s real or inflation-adjusted Gross Domestic Product (GDP) grew at 5 per cent in the June 2019 quarter of financial year 2019–20 (Q1FY20), the slowest growth in six years (25 quarters). There is a debate whether India’s slowdown is a cyclical or a structural one
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. Generally, interim fiscal and monetary measures, temporary recapitalization of credit markets, and need-based regulatory changes are required to revive the economy.
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. India’s slowdown is both cyclical and structural. There are various reasons for the slowdown.
Demonetization And Good And Services Tax (Gst)
On 8 November 2016, the Government of India announced the demonetization of all Rs 500 and 1,000 banknotes. It also announced the issuance of new Rs 500 and 2,000 banknotes in exchange for the demonetized banknotes. The Prime minister of India Narendra Modi claimed that the action would curtail the shadow economy and reduce the use of illicit and counterfeit cash to fund illegal activity and terrorism. The announcement of demonetization was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.
Demonetization over a period of time resulted in cash crunch in the economy. India has a substantial informal economy that runs on cash. A large portion of this involves legitimate activities that are below the tax threshold and therefore should not be thought of as part of the black economy. Agriculture, for example, constitutes around 15 per cent of GDP, runs mainly on cash, and is mostly tax-exempt. The farm economy was hit by the sudden withdrawal of cash from the system during demonetization.
The Centre for Monitoring Indian Economy reported that 1.5 million jobs were lost in the unorganised sector during January–April 2017, just after demonetization. This led to reverse migration to villages. This further led to a substantial increase in demand for MGNREGA work.
Even as the aftershocks of demonetization were being felt, the government introduced GST from 1 July 2017 in such haste that it delivered another huge blow to the economy. GST is a structural reform that was introduced after much deliberations and debate over a period of time. However, it was badly implemented. For example, sourcing from MSMEs took a hit as bigger companies preferred to purchase from suppliers who could provide GST receipts. In other cases, imports were preferred over sourcing from small Indian companies who barely qualified under the GST net. Entire supply chains were disrupted.
There are also reports of increased harassment of taxpayers by overzealous tax authorities. The complex, multiple-slab GST framework, the constant changing of rules, along with the procedural problems, has also hurt small and medium businesses. Together with demonetization, GST has caused substantial job losses, particularly to our most vulnerable workers.
Auto Sector
Automobile sector is facing its worst crisis in twenty years. But what signals a deeper problem is the Society of Indian Automobile Manufacturers (SIAM) report that three hundred dealerships have shut down in recent times. Sales of cars, tractors, twowheelers have declined considerably. SIAM said about ten lakh jobs have been hit in the auto component manufacturing industry. A lot ancillary industries which provide spare parts are shutting down due to decreasing demand for automobiles.
Real Estate
The health of real estate is a massive indicator of the state of Indian economy. It has links with about many ancillary industries i.e. bricks, cement, steel, furniture, electrical, paints etc and affects them all if there is a boom or gloom in the sector. Reports are that the volume of unsold houses over the past one year has increased in the top cities of the countries. According to real estate research company Liases Foras, the unsold inventory currently stands at 42 months. This means it will take threeand- a-half years for the existing unsold flats/houses to clear up.
Fmcg
The Fast-Moving Consumer Goods (FMCG) companies have reported decline in volume growth in the April–June quarter. This has been blamed on a sluggish rural demand, which, in turn, indicates less availability of money in villages. Reports say that the demand for FMCG in rural India was growing at 1.5 times of the urban demand. The rural demand has come down to the level of urban growth or below. FMCG major Hindustan Lever reported volume growth of 5.5 per cent in April–June quarter compared to 12 per cent last year. Dabur posted a growth of 6 per cent against 21 per cent last year. Britannia Industries recorded a volume growth of 6 per cent against 12 per cent in the same period last year. Asian Paints saw its volume growth decrease from 12 per cent in April–June quarter last year to 9 per cent this year.
Bank’s Lending To Msme
The Micro, Small and Medium Enterprises (MSMEs) are the backbone of economic development in any country and more so in India, with its large population needing products and services for their livelihood. At macro-level, lending by banks to industries shows a significant jump from 0.9 per cent in April–June quarter in 2018 to 6.6 per cent for the same period in 2019. The credit to big industries grew by 7.6 per cent during April–June compared to 0.8 per cent last year. Lending to MSME by banks has actually slipped from 0.7 per cent in 2018 to 0.6 per cent this quarter.
Measures Needed
At the top of its priorities, the government must radically simplify and rationalise the GST regime, even if it means a loss of revenue in the short term. Once, a measure of stability is brought into revenues, it is easy to undertake reforms in the structure and operational details. Reducing the number of tax rates is important and it should begin by getting rid of the 28% category altogether and transferring them to the 18% slab. In the next stage, the 12% and 18% categories can also be merged at 15%.
Secondly, the government must find innovative ways to start rural consumption and revive agriculture. Money must be put back in the hands of the people through targeted transfers. There is, however, a strong case to be made for an improved MGNREGA to serve as the vehicle for delivering a rural stimulus. By design, the MGNREGA is a demand-driven scheme (work is provided to anyone who seeks a job). More important, the programme is designed to incentivize participation of agricultural labour, not just farmers. MGNREGA, thus, has the potential of boosting incomes across all sectors of the rural economy.
Thirdly, the government must tackle the lack of credit for capital creation. It is not only the public sector banks, but also the NBFCs that are not lending.
Fourthly, key job-intensive sectors like textiles, auto, electronics and affordable housing must be revived and assured priority lending, especially for MSMEs.
Fifth, we need to find ways to address export markets that have opened up as a result of the trade wars between the United States and China.
Lastly, there needs to be a credible roadmap for massive public infrastructure development, including through private investment.