- What is a cyclical slowdown?
- What is a structural slowdown?
- Slowdown of Indian Economy
- Effects of Economic slowdown
- Suggestions to uplift economic trend
- Way forward
Cyclical or structural? Decoding the nature of India’s economic slowdown
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- India’s real or inflation-adjusted gross domestic product (GDP) grew at 5% in the June 2019 quarter, the slowest growth in six years (25 quarters). In nominal terms, the growth stood at 99%, the lowest since December 2002.
- The recent annual report of RBI stated that the Indian economy is undergoing a cyclical slowdown rather than a “deep structural” one.
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.
- To counter such slow down, 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 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.
- For instance, the current slowdown in the Indian GDP growth for the fourth consecutive year, (from 8.2 % in 201717 to 6.5 per cent in 2020 (Estimated)), suggests the structural slowdown.
Slowdown of Indian Economy
Factors affecting India’s growth are
- A slowdown in consumption demand
- Decline in manufacturing
- Inability of the Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner
- Rising global trade tension and its adverse impact on exports
- Private consumption contributes nearly 55-60 per cent, to India’s GDP has been slowing down.
- Reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.
- The private final consumption expenditure (PFCE) has reached weakest level since 2015.
- The increase in change in stock (in current prices) also indicates inventory build-up and hence reflects consumption slowdown.
- Households, including MSMEs, make. House savings are major contributors towards investment, they are the only net savers in the economy (accounts for 23 per cent of the total savings in the GDP).
- However, savings by household sector (which are used to extend loans for investment) have gone down from 35 per cent (FY12) to 17.2 per cent (FY18).
- The savings reached to a level which isn’t adequate to fund the government borrowings.
- As per the government data, Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy has also
- In addition, since demonetization, the biggest contributor to the total capex in the economy, the household sector has lost its momentum.
Effects of Economic slowdown
On rural economy
- Ther RBI report said that the delayed onset and unequal distribution of the southwest monsoon rainfall may pose downside risks to crop production and to rural consumption demand.
- This is already evident in a sharp contraction in sales of motorcycles and tractors in 2019-20.
On urban economy
- Both passenger car sales and domestic air passenger traffic registered a contraction in recent months.
- There is also fall in output of TV sets, hand tools, passenger vehicles, electrical apparatus and two-wheelers in June 2019 which shows production of consumer durables is contracted.
- Low steel consumption and contraction of both imports and domestic production of capital goods also indicated a slowdown.
On external sector
- India’s external sector is also vulnerable due to risks from global developments, especially the downturn deepening, uncertainty over international crude oil prices and the volatility of capital flows.
Suggestions to uplift economic trend
- Increase in fiscal spending
- Deviation from fiscal deficit target
- Boost in consumption sentiment
- Better liquidity and lower rates will help the recovery of the cyclical component, but for the structural recovery to be recovered, the propensity to consume has to revive.
- Strengthening the banking and non-banking sectors
- RBI has already cut the repo rate by 110 basis points so far in CY19 to 5.4% which is its lowest level since 2010.
- Reserve Bank of India (RBI) also called for counter-cyclical actions in terms of monetary and fiscal policies, along with reforms for the structural slowdown.
- Government has already taken measures, including the rollback of a tax surcharge on overseas investors, improved credit flow, transmission of lower interest rates and relaxations in foreign direct investment (FDI) norms.
- Economists said the slowdown is cyclical but deep-rooted and some structural reforms will be needed to ensure that growth gets back on track.
- Spending on infrastructure and implementation of much-needed structural reforms in the areas of labour laws, taxation, and other legal reforms will enhance ease of doing business in pursuit of fulfilling the vision of India becoming a $5 trillion economy by 2024-25.
- Giving the above scenario, reviving consumption demand and private investment has assumed the highest priority in upcoming financial year.