Overview of the Economic Slowdown in India during FY 2019-20

India, one of the fastest-growing large economies, was showing competitive growth statistics from 2003 to 2008 with the annual growth rate touching 8-9%. However, the first key instances of economic slowdown started to appear after 2016-17, when real GDP growth had peaked at 8.2 percent. In the first quarter of 2016-17, India registered a spectacular GDP growth of 9.4%(1). However, the year 2019-20 has seen miserable changes in growth estimates with the International Monetary Fund (IMF) and the World Bank repeatedly cut the Indian economy's growth rates. Stark differences also prevailed between the growth estimates between the government surveys and other bodies like Moody Investors.

The situation became extreme when the second quarter (July-September) of the current financial year (April 2019-March 2020) witnessed a drastic fall in gross domestic product (GDP) growth rate to 4.5 percent, which was described as the lowest GDP growth rate in the previous 26 quarters. The economic slowdown, which has been disconcertingly long and steep, did not improve even in the December quarter, with the rate of real GDP expansion in the quarter coming in at 4.7 percent. Although, the fall cannot be termed as sudden but not entirely unexpected.

The Statistics office estimates growth slowed to 5% this fiscal year, which ends March 31. (2) The difference is notable in regards to the 8.2% expansion seen in 2017. This has also been regarded as the slowest since 2009 when the global financial crisis hit. The slowdown has also been accompanied by the depreciating saving and investment rates from 2011-12, from around 39 percent in 2012 to 32.3 percent in 2018. (3)

The reasons for the economic regression since the 2010s are mostly domestic and policy-induced. It has been claimed widely that demonetization and the introduction of GST further worsened the ongoing economic slowdown prevailing in the country.

KEY IMPACTS OF THE ECONOMIC SLOWDOWN

The prolonged economic slowdown has severely affected the country's real estate, automobile, construction sectors and especially, overall consumption demand. It has caused unemployment levels to rise and private expenditure to decline, even when government expenditure expanded.

The lower output growth in the economy has reflected in the job losses and withdrawal of workers due to a lack of employment opportunities. This has further caused a rise in the unemployment rate which rose to a 45-year high in 2018. (4) This has further caused stagnation in real wages in rural India. Various sectors and regions have already seen a fall in output and sales and of retrenchment of workers.

India’s per capita GDP is critically low and statistics show that it needs to create around 2 crore jobs every year. It has also been said that in terms of the level of income, India is in the same league as Congo, East Timor, Nicaragua, and Nigeria. (5) The slowdown has further deteriorated the per capita net income. During 2019-20, it is estimated at Rs 1,35,050 with a growth rate of 6.8 percent, whereas during 2018-19 the growth rate was 10.0 percent. (6)

In furtherance of rising unemployment and falling per capita income, there is a situation of weak aggregate demand. The appeal for exports has fallen along with the gloomy issue of demand contraction. There is tight-fisted spending, even on essentials.

The manufacturing sector is barely growing and thus, businesses are curbing investment. Income in the agricultural sector is also falling. Prices of everything are increasing and inflation has extended beyond the central bank`s tolerance limit. The food price inflation also accelerated by 14.1%, led by a jump in vegetable costs. (7) Many construction jobs are also at risk. There is a high probability of the rural economy being the most hit because of the prevailing circumstances.

Banks and other financial institutions have also been cautious about lending in the past few years due to non-performing loans. In the first half of 2019, new banking credit to businesses crashed by a shocking 88 percent (8) The non-banking financial companies are also under constant pressure. Any further deterioration in their position would also gravely affect the banking system.

In the absence of credit incentives from the banks, a revival of the degrading industries seems acutely difficult. However, further easing of rates may push inflation further up. With COVID-19 taking over, the situation of the economy is bound to further deteriorate even after easing the banking regulations.

The constant decline in consumer spending, household spending, and industrial investment has caught the Indian economy in a vicious circle which will take a lot of effort, financially and mentally to recover.

Some of the probable suggestions include simplifying and rectifying GST since it has suffered from excessive rate differentiation, periodic rate revisions, high compliance costs, and low revenue buoyancy. The rural economy has to be boosted to enhance liquidity and demand. However, the chief priority is to stimulate the overall demand using monetary and fiscal policy tools.

CONCLUSION

The Indian economy has many challenges to face currently since the situation will further retrograde as people work from home to curb the coronavirus outbreak. The financial system will have to be restored to revive the economy. The looming dangers need to be acknowledged to cope with the alarmingly sharp slowdown.

[Madri Chandak, a student of Hidayatullah National Law University is in her second year and has a keen interest in the economic and commercial aspects of the law.]

Disclaimer: This article is an original submission of the Author. Niti Manthan does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns.

1. Shantanu Nandan Sharma, Severe slowdown: When will the Indian economy recover and how?, The Economic Times, (Apr. 2,2020, 10:40 AM) https://economictimes.indiatimes.com/news/economy/indicators/severe-slowdown-when-will-the-indian-economy-recover-and-how/articleshow/72310684.cms?from=mdr
2. Vrishti Beniwal, Anirban Nag, Why in India, 6% Economic Growth Is Cause for Alarm, Bloomberg|Quint, (Apr. 2,2020, 11:09 PM) https://www.bloombergquint.com/economy-finance/why-in-india-6-economic-growth-is-cause-for-alarm-quicktake
3. C Rangarajan, DK Srivastava, Economic slowdown: What should the Budget address?, Hindu Business Line, (Apr. 1,2020, 11:30 PM) https://www.thehindubusinessline.com/opinion/economic-slowdown-what-should-the-budget-address/article30635713.ece#
4. Nayyar Azam, Economic Slowdown in India, Kashmir Observer ( Apr. 1, 2020, 7:06 PM) https://kashmirobserver.net/2020/03/09/economic-slowdown-in-india/
5. Nitin Pai, US investors concerned over India’s economic slowdown, social unrest, and Modi’s disinterest, The Print, (Apr. 2,2020, 9:02 PM) https://theprint.in/opinion/us-investors-concerned-over-indias-economic-slowdown-social-unrest-and-modis-disinterest/352490/
6. Abhishek Raja, Accepting India`s Economic Slowdown, Outlook Money (Apr. 1, 2020, 6:13 PM) https://www.outlookindia.com/outlookmoney/finance/accepting-indias-economic-slowdown-4246
7. Vrishti Beniwal, India's Inflation at 7.35%, Bloomberg, (Apr. 1, 2020, 7:22 PM), https://www.bloomberg.com/news/articles/2020-01-13/india-inflation-breaches-6-limit-on-rising-food-fuel-prices
8. Ibid at 6.