INTRODUCTION
The economy of India has been slowing down since 2016-2017 when real GDP growth had peaked at 8.2%. According to the CSO’s advanced estimates, it has fallen to 5% in 2019-2020 ,the lowest since 2008-09,which was the year of the global economic and financial crisis. Nominal GDP growth in 2019-20 is expected to be 7.5%,which is the lowest level since 1975-76,a 44 year low.
India’s ongoing slowdown has been accompanied by erosion of saving and investment rates since 2011-12,when these had peaked at 34.6% and 39% of the GDP respectively, measured in current prices. Since then, the saving and investment rates have fallen steadily to 30.5% and 32.3% respectively in 2017-18.
Although information on the saving rate is not available for more recent years, the investment rate for 2019-20 can be estimated at 30.1% of the GDP by summing up gross fixed capital formation, valuable and change in stock. This persistent erosion of saving and investment rates have reduced India’s potential growth rate to close to 6.5%. In fact, the fall in actual growth is even below this reduced potential growth at 5% in2019-20.
The financial system and more particularly, the banking system is in distress. The non-performing assets ratio of public sector banks as of September 2019 stood at 12.7%. The non banking financial companies are also under pressure and further deterioration in their position would also affect the banking system.
Had the banking system been strong, it could have been used as a lever for stimulating growth. This is hardly so. In fact, it has become a drag on the fisc. On the monetary side, the RBI has the repo rate since January 2019 by 135 basis points in five incremental steps . However, the transmission mechanism has been extremely slow due to problems and rigidities in India’s financial sector.
Any room for further reduction in the repo rate does not appear to be round the corner, as the CPI inflation rate spiked in December 2019 at 7.35%,which is well outside RBI’s comfort limit of 6%. All eyes are, therefore, on budget 2020-21 and the available fiscal policy options.
REASONS FOR SLOWDOWN IN INDIAN ECONOMY
The Government is committed to make a 5 trillion dollar economy in five years from now. But it seems the Indians are buying less as the economy is losing steam. There are many factors behind India’s economic slowdown such as weak demand in auto sector, a slump in fast-moving consumer goods (FMCG) sector, dip in core sector growth, drop in industrial production. IMF and CRISIL slower growth rate projection for India.
1.WEAK DEMAND IN THE AUTO SECTOR
Auto companies such as Maruti Suzuki, Hyundai and other three companies reported a double-digit decline in sales on July due to subdued consumer sentiment. Domestic sales of Maruti Suzuki India (MSI) were down 36.3% at 98,210 units last month compared to 1,54,150 units in July last year. Hyundai motor India Ltd (HMIL)posted 10% dip in domestic sales at 39,010 units last month as against 43,481 units in July 2018.
Similarly, Mahindra reported a 16% decline the domestic market at 37,474 units as compared with 44,605 units in July 2018. Honda cars India Ltd (HMIL) posted 48.67⁵ decline in domestic sales to 10,250 units in July as against 19,970 units in the year-ago period . Richer motors while commenting on company’s performance said,” The two-wheeler and CV(commercial vehicles) industry continue to face headwind on account of weak consumer demand “.
2.CORE SECTOR GROWTH NEARS 4-YEAR LOW
Growth of eight core industries dropped to 0.2% in June mainly due to a contraction in oil-related sectors as well as in cement production, according to official data. The eight-core sector industries-coal, crude, oil,natural gas ,refinery products, fertiliser, steel, cement and electricity-had expanded by 7.8% in June last year. During April-June, the eight sector grew by 3.5% compared to 5.5% in the same period last year.
3.A SLUMP IN FMCG SECTOR
FMCG major ,Hindustan Unilever Ltd (HUL),posted seven per cent of volume growth in the last quarter, a fall of 11% from the April-June quarter of 2018. Also, another major the sector-ITC and Godrej have also reported a single-digit growth,. While announcing the latest quarterly results. ITC said, ” The FMCG-other segment delivered a resilient of performance during the quarter amidst a marked slowdown in the FMCG industry across urban and rural markets “. Godrej consumer products said, ” Our India business delivered steady volume growth of 5%, amidst a general slowdown in staples consumption. We expect a gradual recovery in the coming quarters for industry and also for our business “.
4.INDUSTRIAL PRODUCTION GROWTH SLIPS TO 3-MONTHS LOW
Industrial production growth dropped to 2% in June, mainly on account of the poor show by mining and manufacturing sector, according to official data released on Friday. Factory output, as measured by the index of industrial production (IP),had expanded by 7% in June 2018. There was a slowdown in the manufacturing sector, which grew at 1.2% in June as compared to 6.9% a year ago. The expansion in power generation sector stood at 8.2%,compared to 8.5% earlier. Mining growth dropped to 1.6% in June from 6.5% in the corresponding month of the last.
5.IMF,CRISIL CUT INDIA’S FY20 GROWTH FORECAST
Last month, the international monetary fund (IMF) projected a slower growth rate for India in 2019 and 2020 , a downward revision of 0.3% for both the years, “India’s economy is set to grow at 7% in 2019,picking up to 7.2% in 2020 . The downward revision 30.3% point for both years reflects a weaker-than-expected outlook for domestic demand “,The international monetary fund (IMF) said in its world economic update. Rating agency CRISIL, has lowered its estimate of India’s GDP growth by 20 basis points (bps) to 6.9% for the current fiscal ending March 2020 due to downward risks like a weak monsoon and slowing global growth.
CONCLUSION
Perhaps in the coming budget, we need to allow some relaxation and take the fiscal deficit to 3.6% of the GDP. We must, however make sure that the additional expenditure is only for capital expenditure. The Government should also clean up the accounts and show a true fiscal deficit. The reform agenda must be carried further. While there are many things that require to be done, one area that require immediate attention is the financial sector, restoring it to a healthy state is a must for reviving the economy. It is also true that a revival of the economy will help to reduce the non-performing assets. Over the medium term, a serious look is needed on the public sector banks. A reference to this in the budget will help. In my opinion, the focus of Government must be exclusively in development of our country.
DONE BY:LAKSHMIPRIYA. D
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