Economists are worried about a slowdown in the growth of Indian economy and recent growth numbers substantiate it. What are the reasons for the same? Offer solutions. (250 Words)

Mentors Comments:
1. Discuss in brief about the slowing down of growth across the globe and India in particular.
2. Explain the reasons behind the same.
3. Provide solutions.

Answer:

India recently surpassed France to become the sixth largest nominal GDP globally and is looking strong to take over United Kingdom in near times. However, there has been recently, a steady decline in the economic momentum in India, and growth expectations for the current year have already fallen from 7.4% to 7%, thus making it important to find the reasons affecting our economic growth.

Following are the signs to suggest that the Indian economy slowing down:
1. Sales of Maruti Suzuki, the largest carmaker, and Tractor sales for Mahindra have declined in December 2018. Two-wheeler sales too started crawling since December.
2. There are signs of a consumption slowdown spreading to non-discretionary items such as food items. Thus far, it was feared to have impacted only discretionary expenditure – in products such as cars and consumer durables.
3. Macro indicators too aren’t presenting any encouraging signs either. First, eight core
segments — steel, cement, fertilisers, coal, electricity, crude oil, natural gas and refinery products, which together make up about 40% of industrial production – grew at 1.8 per cent in January this year, compared with 2.8 per cent in the previous month.
4. The growth in industrial output itself dropped to 1.7% in January 2019 against a growth of 2.6% in December 2018. In the corresponding month i.e. January 2018, it had grown 7.5%.
5. The GDP growth rate in the first three quarters (April-June 2018, July-September 2018 and October-December 2018) of the current financial year ending March 2019, the Central Statistics Office estimates, was 8 per cent, 7 per cent and 6.6 per cent, respectively. This clearly shows a trend of sequential slowing down and these numbers
corroborate the signals that have been visible on the ground.
 
The reasons why the economy is slowing down-
1. The demand for passenger vehicles slowed down during the second half (beginning September 2018) of this financial year because of many reasons — high interest rates, higher fuel prices and lack of credit. However, many in the industry say consumers have only postponed the decision to purchase vehicles, suggesting that there is no permanent destruction of this demand.
2. At a very broad level, demonetisation — a radical policy decision — and introduction of Goods and Services Tax — a structural reform — naturally had an adverse impact on the economy.
3. Over the last two years, bank credit slowed down dramatically because banks had to make higher provisions for bad loans. With six public sector banks under the central bank’s prompt corrective action framework, and some others voluntarily having pressed the pause button on lending, retail and businesses found it quite difficult to access credit.
4. Poor bank credit, liquidity crisis and high interest rates all created a huge drag on the economy.
5. Recent failure of Non-Banking Finance Companies (NBFCs) which had stepped in to support credit growth has resulted in restricted growth to ensure survival, as a result of which system-wide credit growth has slowed sharply.
6. Government has also failed in addressing these issues as there is a general apprehension of running into the risk of another build-up of bad loans.
7. There has been a reported drop in the households’ financial savings to GDP ratio in 2017 to 9.4% highlighting the fact that there aren’t enough savings available for both the government and the private sector to be funded adequately, which further impedes the growth.
8. There are several other challenges such as a weak and ailing real-estate market, problems in agriculture, worrying levels of external dependence in India’s energy ecosystem, crumbling municipal infrastructure, and stagnating capital flows, among several others.
9. Ongoing trade war and global slowdown and increasing competition from countries like Bangladesh, Vietnam etc who still given preferential treatment over India.

Way forward-
1. Raising investment rates to 36 per cent by 2022-23 • To raise the rate of investment (gross fixed capital formation as a share of GDP) from about 29 per cent in 2017-18 to about 36 per cent of GDP by 2022-23, a slew of measures will be required to boost both private and public investment.
2. Investment in housing, especially in urban areas, will create very large multiplier effects in the economy. Investment in physical infrastructure will address longstanding deficiencies faced by the economy.
3. Efficient financial intermediation: Efficient functioning of the financial markets is crucial to maintain high growth in the economy.
4. The Gujarat International Finance and Tech City (GIFT) should be leveraged to push the envelope on financial sector liberalization. It is an opportunity to onshore trading in rupees and other derivatives, which currently happens outside India for regulatory reasons. If GIFT succeeds, liberalization can be extended to the rest of the country.
5. Enable alternative (to banks) sources of credit for India’s long-term investment needs. The bond market needs deepening through liberalization of regulations and continued fiscal consolidation
6. Leave more disposable income in the hands of individuals and more investible surplus in the hands of corporates.
7. Force banks to transmit repo rate cuts (only 1.1 per cent of the 2.6 per cent repo rate cut has been passed on) seamlessly to the consumer and industry.
8. Tinker with GST and other tax rates as far as possible (auto industry, for instance, is asking for 18 per cent GST instead of 28 per cent)
9. Implement new Direct Tax Code and corporate tax at 25 per cent across the board
10. Perhaps, an economic stimulus with a combination of the above coupled with an investment allowance (deductible against tax payable) to encourage fresh investment into new plant and machinery.

In the long run, we need structural reforms to make the recovery as robust and well entrenched as possible. These are:
 Government, the biggest litigator with over half the pending cases in courts, must exercise caution in appeals.
 Labour reforms that compress 40-odd labour codes and reduce compliance time and costs
 Land reforms to make land available to industry on-tap
 Ease compliance burden/ease of doing business across the country; not just in Mumbai and Delhi
 An attempt to revive the economy via structural reforms alone is a 5-year agenda. India can’t wait that long; waiting for GST, IBC and banking reforms to settle down to trigger economic revival is taking it into a 2-3 year horizon. The nation can’t wait that long either.
 Explore closer economic integration within South Asia and the emerging economies of South East Asia particularly Cambodia, Laos, Myanmar and Vietnam.
 Import tariffs that seek to promote indigenous industry should come with measures to raise productivity which will provide the ability to compete globally.

India’s growth has been impressive in recent years but this is a country whose development is hampered by endemic structural problems. India requires significant investment in infrastructure, manufacturing and agriculture for the rapid growth rates of the last fifteen to twenty years to be sustained. In order to fulfil this it needs to create a robust financial structure that can serve the needs and demands of growing nation.

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