GS-3, Uncategorized

Economic Slowdown

Context

  • 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).
  • In nominal terms, the growth stood at 7.99 per cent, lowest since December 2002.

What is a cyclical slowdown?

  • 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 recapitalisation of credit markets, and need-based regulatory changes are required to revive the economy.

What is a structural slowdown?

  • 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.

Dissecting India’s slowdown

  • A slowdown in consumption demand
  • The farm sector is still stuck in a low income trap and 2019’s mercurial monsoon rains, has left some parts flooded and others still facing deficits and engendering a shortfall in kharif sowing, rural demand is unlikely to return
  • Decline in manufacturing
    • The slowdown in the auto sector has worsened, with leading car manufacturers posting up to a 50 per cent drop in sales for August 2019 as against the corresponding month last year. Sales are down across segments — passenger vehicles, commercial vehicles, and two-wheelers.
      • The slowdown in the auto industry is due to a number of factors, such as the liquidity crunch due to continued stress on NBFCs (Non-Banking Financial Companies), the wait for the festive season, the change in axle load norms for trucks, and hopes of a GST cut.
    • inability of the Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner, and
    • rising global trade tension and its adverse impact on exports are some of the factors affecting India’s growth
    • The health of real estate is a massive indicator of the state of Indian economy. It has links with about 250 ancillary industries — 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.
    • It is also attributed to two mega policy decisions — demonetisation in November 2016 and the rollout of the Goods and Services Tax (GST) in July 2017 — disrupted the Indian economy.
      • Aimed at greater formalisation of the Indian economy, the twin disruptions struck a big blow to the informal sectors that employ the maximum number of the workforce.
      • The policy disruption hangover still continues and is accentuated by the crisis in banking and non-banking financial sectors.
      • This hit the small and medium scale businesses more adversely than expected in the wake of the collapse of Infrastructure Leasing and Financial Services (ILFS).
      • Money just stopped flowing into the market. The net result was a huge job loss.

A look at key economic Parameters

  • the mainstay of demand — Private Consumption Spending — slumped to an 18-quarter low, with the expansion decelerating sharply to 3.1%, from 7.2% in the preceding quarter and 7.3% a year earlier.
  • Gross fixed capital formation (GFCF), a proxy for investment activity, grew a meagre 4%, less than a third of the 13.3% growth it posted 12 months earlier.
  • With demand for Manufactured Products ranging from cars and consumer durables to even biscuits having sharply diminished, manufacturing GVA growth plunged to an eight-quarter low of 0.6%.

Steps introduced by Govt

  • The government is cognizant of the gravity of the situation has initiated policy pronouncements including
    • tweaks to investment norms to draw more Foreign Direct Investment,
    • moves to relieve the debilitating sales slump in the auto sector and
    • A sweeping consolidation of public banks.
  • As part of its measures to boost economic growth, the government has lifted the ban on its departments buying new vehicles, announced a tax benefit for automakers, deferred the application of the one-time registration fee till June 2020, and assured that the government would consider a scrappage policy for old vehicles
  • Any beneficial impact from these measures will, however, take time to feed into the economy

Conclusion

  • The government must lose no time in consulting with the widest possible spectrum, including the Opposition, and then implement the agreed-on reforms prescriptions to reinvigorate demand and investment.

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