India is the second fastest growing economy in the world growing at 6 percent after China’s growth at 6.1 percent. This is, however, a decline from last year’s 7.4 percent. The GDP growth rate has been declining continuously for last five quarters and fell to 6 years low at 5 per cent in June quarter. The slowdown in the economy is real and is not limited to slowdown in investment but consumption as well. Lower employment, stagnant income and rural distress have compounded the slowdown. The near-term outlook of the economy is not very encouraging. The Trade and Development Report 2019 released by the UN Conference on Trade and Development (UNCTAD) says that the slowdown in India “continues a decelerating trend which began four years ago.” The report noted that two growing Asian economies are showing a loss of growth momentum
A large part of India’s economic slowdown is due to domestic factors. As Raghuram Rajan says neither global economic woes or rising oil prices can be blamed for the slowdown in the Indian economy. He puts the blame on lack of investment and the double whammy of demonetisation and the poor implementation of GST on the economy.
Demonetisation and GST took a toll on the economy. The most severe effect is visible on rural economy as a large proportion of transactions in the agricultural sector happen in cash. Moreover, the shock collapsed the fragile system of exchange between farmers and labourers and deepened the existing agricultural wage crises. Moreover, poor implementation of GST is blamed for stalling the business environment.
Agriculture income growth has been badly hit and incomes have been stagnant for long. Agriculture is anyway a long neglected sector. Lack of formal market for agricultural produce along with rising costs of inputs including seeds and pesticides have dramatically reduced the profit margins for farmers and the situation is not improving. Doubling farmers’ income by 2022 remains rhetoric. Farmers are desperately looking for reforms for easy access to adequate credit, crop insurance and fair price for their produce.
PM Kisan has not been very helpful. It has been estimated that 33 percent of the original allocation will remain unutilised which is around Rs 75,000 crores. In many states like Bihar and Madhya Pradesh farmers are still waiting for payments. Some of the delays has to do with Aadhaar conditions, which are now being relaxed.
Poor agricultural income has impacted India’s consumption. Lower sales growth have been recorded in fast-moving consumer goods (FMGC) industries. SBI report notes that significantly depressed rural prices is disturbing rural income and weak demand is affecting the FMCG sector. Crisis in the aviation sector has impacted passenger traffic growth.
Private investment has also not picked up despite capacity utilisation hovering around 75 per cent. Even credit growth has taken a hit. Crises with regard to ILFS, NBFCs and PMC Bank highlight that how networks of collusion and corruption bypassed rational credit processes.
The government has intervened by introducing cuts in corporate taxation and addressing NBFC liquidity crisis by infusing NBFCs with bank funds. However, Nobel laureate Esther Duflo has pointed out that corporate tax cuts could be the wrong prescription. She pointed out that cutting taxes will impact public expenditure and cutting expenditure in the middle of crisis is not a good idea. She advocated the idea of universal basic income as something that should give people security and assurance so that they can try new things and have the confidence to improve their lives.
This confidence is at an all time low given recent cuts in jobs in every sector. 350,000 jobs in the automobile sector have been lost. The unemployment is at a 45 year high. Many small and medium scale companies have been forced to lay off lakhs of employees. While contractual employees (mid-to-junior level) are becoming the first casualties of the slowdown, industry experts indicate that a prolonged effect could have a severe impact on India’s overall employment figures.
The Indian economy is in poor shape. It is not able to harness its demographic dividend or boost consumption industries despite the large population. If it continues down this path, large numbers of young people will find themselves without jobs and in poverty. It will further lead to social problems like crime. India must take drastic measures to pull itself out of this spiral.