ECONOMIC SLOWDOWN IN INDIA

By Tiya Jacob

I BA Economics

Economic slowdown occurs when the rate of economic growth slows in an economy. India has seen a economic slowdown in 2019 , with the country’s real estate ,automobile ,construction sectors and overall consumption demand facing a serious and constant decline. We had witnessed a drastic fall in gross domestic product (GDP )growth rate to 4.5 percent,even as international bodies like The International Monetary Fund(IMF)) and the World Bank repeatedly cut Indian economy’s growth rates. This was described as the lowest GDP growth rate in the previous 26 quarters, which means in over six years. The main reasons attributed to the fall in GDP growth rate were contracted manufacturing activities, weakened investments and lessened consumption demand.

In the words of former governor of RBI Raghuram Rajan,there are signs of “deep malaise”in the Indian economy. ” Growth is slowing significantly and there is currently little fiscal space available to the government to spend more. Corporate and household debt is rising and there is deep distress in parts of the financial sector and Unemployment seems to be growing”.

Economic slowdown and high unemployment put pressure on Modi’s re-elected government and the Central Bank to stimulate the economy to boost growth and create more jobs.

Reasons for economic slowdown

• Effect of Demonetization: To start with, private consumption has taken a beating due to Demonetization as consumers suddenly prefers to hoard cash or keep it in the bank instead on spending on consumer goods. Moreover ,demand has also collapsed in the rural areas as the entire rural economy runs on cash and Demonetization led to the loss of jobs as well as incomes thereby squeezing the rural consumer who now prefers to wait and watch as well as to postpone consumption except that of essential goods and services. Demonetization has also lead to small and medium businesses to withhold investments since they too operate on a cash basis and the cash crunch has left them high and dry. Thus what we have is a situation wherein cash has dried up leading to a slowdown in the economy.

• Rollout of GST: The fact that the rollout of the goods and services tax (GST) on a nationwide basis has led to the slow down cannot be denied.Indeed ,GST has hamperd the small businesses more than Demonetization by forcing them to withhold inventory until they mitigate to the GST Network and become complaint with the numerous rules and regulations that are part of this tax. It can be said that the implementation of GST is also flawed thereby exacerbating some of the factors that have contributed to the slowdown.

• Unemployment: A drop in number of employment and wage levels has hastened the slowdown and the slump in consumer demand. High level of unemployment arises due to may factors like poor employability of graduates ,low job creation etc contribute to the economic Slowdown.This is because less employment brings in lesser income and hence lower demand.Consumption is the bedrock of demand ,a vital market force needed to fuel the economy.

• The liquidity crisis and the issues revolving around the banking sector are one of the major contributors to the economic slowdown.Due to the low liquidity,the banks are reluctant to lend credit to the businesses.This much- needed credit could infuse life into decelerating economy.

• International Issues: International issues are also affecting the slowdown.The US China trade war and Brexit are the political components of these global spillovers .The US is also engaging in retaliatory tariff actions against India, especially when the domestic economy was looking to the global demand potential to compensate for the dropping domestic demands.

• Global slowdown: The most important factor is that there is also global economic slowdown that is happening and given the fact that India is a net commodity exporter,there has been a slump in the volumes of exports. Apart from that ,the global slowdown has also been accompanied by a retreat of globalization which has resulted in Foreign Direct Investment(FDI) being only in the areas of speculative finance and distressed assets purchases rather than into investments that help the real economy. Thus it can be said that ongoing global headwinds also have contributed to the slowdown in the Indian economy.

• Lower investments: This is the final nail on the slowdown coffin . Investments are a key to more business activities, resulting in more jobs higher earnings and eventually higher spending .This virtuous cycle of investments is the key focus of the previous year’s economic survey as well and is credited to be the Central of the government reforms.. Investment levels have bottomed out in the last two years as foreign institutional investors marked an exit from the Indian Stock markets.FIIs have withdrawn about 15000 crore from the Indian markets in 2018-19. A poor consumption outlook is likely to result in businesses holding back on their investment plans.We would need investments to revive .For that a number of measures need to be undertaken,including the government ramping investments in building public infrastructures and other assets.