According to the latest data available, the Indian economy is witnessing an economic slowdown. Economic growth is facing a downward spiral of 5% for the financial year 2019-2020. This is an 11-year low.
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Economists have pointed out a number of reasons for this downward trend. Let’s take a look at some of them:
The output of the Indian manufacturing sector shrank to the lowest in eight years. In August 2019, the index of industrial production (IIP) fell by 1.4%. In September, the IIP declined to 4.3%. In September, consumer durables fell by 9.9%, capital goods output declined by 20.7%, infrastructure and construction goods fell by 6.4%. The only division that tasted success was the intermediate goods sector which grew by 7% in the same month.
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Non-banking financial companies are essential for economic growth in the country. They provide financial assistance to firms, who may not have access to bank loans. These are good in the long run, however, the presence and growth of the companies do have short term impact as well. Turbulence in the non-banking financial institutions is a major cause for the economic slowdown.
Income inequality hinders economic growth. According to the world inequality report 2018, the top 10% of India’s population received 54% of all income and the bottom 50% shared the remaining 15%. This impacts demand in various sectors like automobiles, consumer goods and so on. Demand reduces and the economy does not prosper.
India has a low labor force participation ratio. A large section of women in India chooses not to work. This deprives them of contributing to the economic development of a country. Agriculture remains the major occupation of the population. A high percentage of labor is engaged in agriculture. But, their contribution to income or productivity is low. The service sector contributes 50% of the GDP and has a high-value addition. But, it employs only a small portion of the population (roughly 25%).
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Demonetization has changed the private consumption patterns in India. People are spending less on consumer goods and prefer keeping cash in bank accounts; due to a shortage of ready cash. Small and medium enterprises that run on cash are also facing a downturn. The shortage of ready cash has limited people’s consumption behavior to a large extent.
Non-performing assets (NPA) have caused most of the public sector banks to land in severe problems. They have tightened lending options. Due to bad debts and declining demand, the lending business is collapsing and there are no fresh investments. RBI or the government need to take necessary action to break this cycle.
The new tax regime, goods and service tax has contributed its share towards the slowdown of the economy. Small businesses were affected more by GST than the larger ones. It forces them to hold their inventory until they reach the GST network to become compliant with the numerous rules and regulations that are part of this tax.
See Also: Indian Economy
There is a global slowdown happening and this also impacts the economic state of the country. India is an active commodity exporter, and the global slowdown has led to a decline in the volume of exports. This has impacted foreign direct investments. FDI is limited to certain sectors thereby reducing investment in sectors that help boost the economy.
The economic slowdown is a part of the major structural shift that is happening across the country. The economy is shifting from a high investment era to a low investment era. From a cash-driven economy, a digitally enabled economy is sprouting up. This slowdown can be considered as an initial breakdown that takes place before any great revolution.
Car sales fell by 23.3% from April to June 2019. This is by far the greatest quarterly sales fall since 2004. A downfall in the car industry affects all other companies in the automobile industry like the tyre manufacturers, steel manufacturers, steering manufacturers and so on. The vehicle loan growth also reduced to 5.1%, which is the slowest in the last 5 years.
There are a number of reasons for the economic slowdown in the country. Necessary action like ways to improve the business climate, debt management, and government laws can improve this situation. This is just a slowdown and not a recession, and the economy is expected to grow in the near future.
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