Current Economic Slowdown Overview
Post on 04,September 2019   5:00 AM
By - Miss. Vibha Yadav
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India is undergoing an economic slowdown. Its GDP grew at 5% in the first quarter of FY20, making the slowest growth since the fourth quarter of FY13. In its annual report for 2018-19 released on 29 August, the Reserve bank of India (RBI) had said that the slowdown was cyclical, rather than structural. But many experts comment that this economic slowdown is more than cyclic one which also reflected by the current monitory corrective measure of RBI not producing the desired result.

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. interim fiscal and monetary measures, temporary recapitalisation of credit markets, and need-based regulatory changes are required to revive the economy.

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. A monetary and fiscal stimulus won\'t be enough to revive the economy.Fixing such problems would require the government to undertake some structural policies. The best example in this regard would be the reforms that were carried out to address the crisis in 1991.

Reasons behind the whole issue
  • Consumption: Private consumption, which contributes nearly 55-60% to India’s GDP, has been slowing down.One of the reasons of reducing urban consumption is reduced income growth of households and drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.
  • Savings: Savings by household sector have gone down from 35% (FY12) to 17.2% (FY18). Households, including MSMEs, make 23.6% of the total savings in the GDP.
  • Investment: Gross Fixed Capital Formation (GFCF) has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data show. Similarly, in the private sector, it has declined from 26.9% in 2011 to 21.4% in 2018.
  • NBFC crisis triggered by IL&FS default led to a liquidity crunch in the economy.
  • RBI’s Annual report highlighted that there are still structural issues in land, labour, agricultural marketing and the like that need to be addressed.

Recent steps taken to come out from the crisis
  • Rate cuts by RBI to lower the interest rates.
  • Surplus transfer by RBI to the government can help in boost planned spending without compromising the fiscal deficit targets.
  • Merger of public sector banks will improve the credit culture in economy and spur investment in the economy.
  • Concessions impacting upon the automobile sector.
  • Change in practice of income tax department.

Way Forward: Revision of procedure for issuing an IT notice, it has potential to address the problem of tax terrorism but require proper social auditing of it\'s implementation. Infusion in banks are good but need some reforms like enforce honest behavior & ring-fence the public sector banker from political pressure. Economic survey 2018-19  asked for taking measures to boost investment, especially private investment, that is the \'key driver\' that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.

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