By Parvathy Ramanan
India is one the fastest growing economies in the world . But in the recent years, there has been a slowdown in the economy . Slowdown on economy occurs when the rate of economic growth declines . It is calculated in terms of Gross Domestic Product which is totality of goods and services produced in the economy in a certain period of time . Recently, the GDP fell by 5.6% as compared to a previous 6.8 %. Few reasons for such a slow down is given below :
1. Demonetisation
On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 notes. Demonetisation is the act of stripping down a currency of is legal tender .Along with it ,it announced the remonetisation of new ₹500 and ₹2,000 notes. The Prime minister of India Narendra Modi claimed that the objective of demonetisation is to curb black money and corruption of hoarding cash , preventing the counterfeiting of currency notes and fight against terrorism and terror funding.
The demonetisation and remonetisation of notes has had an adverse effect on the economy. It has majorly impacted businesses, agriculture sector ,industrial sector, stock market . The implementation of such a huge plan have certainly shook the confidence and trust of business men . According to the secretary general of the Confederation of All India Traders (CAIT) ,Mr Praveen Khandelwa , in the first four months after demonetisation, business was down by as much as 50% for small traders. It took about six months for the situation, currency flow and business to normalize.” Not only during those months ,but I think even after 3 years of implementating it ,it still has an effect on the working of the firms . About 61% of Indian population is rural and are dependent on agriculture which is their primary source of living. The sector is mainly dependent on cash for carrying out each transaction from buying seeds ,fertilizers to transportation of their produce in the markets. But after the notes were stripped of their legal tender , farmers couldn’t purchase seeds at the right time for the upcoming sowing season . And due to this ,their harvest was low the coming year .
According to a 2018 report from the Reserve Bank of India, approximately 99.3% of the demonetised banknotes, or ₹15.30 lakh crore (15.3 trillion) of the ₹15.41 lakh crore that had been demonetised, were deposited with the banking system. The banknotes that were not deposited were only worth ₹10,720 crore (107.2 billion), leading analysts to state that the effort had failed to remove black money from the economy. The BSE SENSEX and NIFTY 50 stock indices fell over 6 percent on the day after the announcement . The move reduced the country’s industrial production and its GDP growth rate. I think the mere implementation of demonetisation has brought the GDP to a low 6.7% from 7.1% . It has shakes the ground of confidence of the common man , the trust of the business organizations and farmers on the government.
2. Decline in PFCE
PFCE or Private Final Consumption Expenditure is the expenditure incurred on goods and services by households and non profit organizations serving households . In the recent years, the Private Final Consumption Expenditure is declining which is one among the major reasons why the growth rate is slowing down . People are not willing to spend their money as they are more willing to hoard their cash or spend less on consumer goods .
In the rural areas too ,there is decline in demand for goods . Most of the transactions taking place in rural areas are on cash and people there too are willing to consume less. After the demonetisation , there has been a huge loss of jobs which has lead to decline in income of individuals . So will less cash in hand ,people are not willing to purchase now but are postponing their consumption except on necessary goods and services . The people should spend more on the consumption of goods . If there is no Consumption, the stock of the producers lie unsold which makes the producer to reduce to production ,which will lead to less contribution to the economy and will lead to low GDP .
3. Struggling MSME’s
MSME’S or Micro ,Small and Medium Enterprise’s contributes to approximately 37% to the GDP and is considered to be the backbone the Indian economy . They are the second largest employment sectors in India after agriculture . These industries are dependent on cash for their day to day needs to pay wages, to net working capital requirements etc. GST along with demonetisation affected these industries. Many of them give their good on credit to their customers and the longer it takes for them to collect these payments, longer they will face cash crunch. This will affect their day to day operations, reducing production and sales, affecting the employees. Moreover procedural delay and transaction cost alone affected them when there was a downturn in demand. The global economic slowdown has also affected these industries
4. Decline in Investments
Investment are really important for a organization to successfully continue its operations . An investment in an organization leads to advancement in the production and leads to higher earnings ,higher consumption and certainly higher employment opportunities to people . So ,investment helps a great deal in the growth if the economy . But in the past 2 years, the investment has gone down . If there is no investment, there would be fall in production , which leads to fall in earnings and employment opportunities, directly affecting the economic growth . For example in the case of vehicles, faster sales indicate a robust activity on the infrastructure and industrial front. The sales of vehicles have gone down by 9.5% during April to June 2019 ,where as between April to June 2018 ,the sales had gone up by 51% . This shows that things are not well at the investment front .
5. NBFC crisis
NBFC’s or Non Banking Financing Companies are non banking financial institutions which grant credit to those segments of the population to whom banks are skeptical in lending loans because if their risky credit profile. NBFC crisis started with the failure of IL&FS , one among the most respected NBFCs in India. They grant loans for infrastructure projects, white goods and houses. With a debt of around 90000 crores and the inability to access enough resources to pay back the loans, found them in a asset liability mismatch. They had more liabilities and fewer debt. This led to banks reducing their NBFC exposure resulting in lack of access to resources to pay the debts. Moreover , infrastructural projects had longer gestation period which meant higher risk . IL&FS used to raise loans through commercials papers which affected the individuals, mutual funds and banks. It also led to a decline in investment projects
6. Inflation
Inflation is a situation of a sustained increase in general price level of in the economy in a period of time or the increase in price of living due to the increase in price of goods and services . In the recent past, the prices of vegetables such as onions ,which are consumed widely by the rich and poor rose to around Rs 200 per kg . Consumer price inflation in India jumped to 7.35% in December of 2019 from 5.54% in November and well above market expectations of 6.2% . As inflation rises ,the business men tend to raise the price of their products and the banks have to raise the interest rate in order to maintain a profit margin and higher rates means that the marginal businesses will fail, thus increasing unemployment and harming the overall economy. As there is high inflation ,it increases the cost of living and also makes the consumers want to spend their money before the value for it falls . This can lead to debt and failing to save money and low economic growth . According to the Indian Ministry of Statistics And Programme Implementation, inflation rate of India as of May 2019 was 5.5% . The government should try to keep the inflation in control or it can lead to further slowdown in the economy.
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