Will Indian Economy Recover From Slowdown or Just Worsen?

by Saurabh Dwivedi - 29 February, 2020, 12:00 5296 Views 0 Comment

The Indian economy is characterised as a developing market, placed as the fifth-largest economy by nominal GDP and the third-largest by purchasing power parity. In recent times, India’s GDP growth rate has dropped to 4.5 percent in 3rd Quarter of 2019-20, the government’s enthusiasm for two-fold digit development is not so distant past. Pushing India into a $5 tn monetary behemoth by 2024-2025 likewise appears to be far-fetched at this point.

The fall has been abrupt but not much surprising. India achieved an astounding GDP development of 9.4 percent in the primary quarter of 2016-17. Today, it is battling at lamentable 4.5 percent. It is going through a crisis, no doubt. There’s only one question that hits very hard, to what degree will it last? Will Finance Minister Nirmala Sitharaman’s efforts like corporate tax cuts and infusion of large capitals into banks can prove to be an elixir for the Indian economy? Or is there any other approach to quicken recuperation?

In September, the Center reduced the corporate tax from 30 percent to 22 percent for private companies that don’t seek exemptions, along with new manufacturing firms’ corporate tax rate lowered from 25 percent to 15 percent. Chief Economic Advisor (CEA) Krishnamurthy Subramanian said “corporate tax cuts were announced to make India attractive for investors in the face of competition from Thailand, Vietnam and China. Tax rate cuts are necessary but are not necessarily sufficient conditions for attracting investments because investors look at after-tax returns.”

A data showed by an Azim Premji University showed agricultural employments reduced by 27million, or 11.9 percent from 2011-12 to 2017-18 period while the youngsters from rural areas are looking for incompetent jobs in employment schemes like MNREGA. In 2018-19, the agricultural growth had faced the fall of 2 percent which directly or indirectly impacted the two-thirds of Indians living in rural parts of the country. Former Union Secretary Ajay Dua writes “what is of utmost necessity is building up aggregate demand. With poor competitiveness and a slowing world economy, Indian goods and services are not expected to win new overseas customers. In a domestic-driven economy like ours, the answers have to be found within, and the process of amelioration must begin in our vast rural geography.”

Trade and investment are the backbones of any economy, as a mixed economy, India is susceptible to massive bad loans in the financial sector, disguised further by a macroeconomic bonanza from low global oil prices and the transitions to a new indirect taxation system of the Goods and Services Tax (GST). The UNCTAD (United Nations Conference on Trade and Development) said in its International Trade report of 2019, the international trade in the past few years was marked by a peaky growth (2012-14), then a dip in (2015 and 2016) and a strong rebound (2017 and 2018). The reason for the rebound was global output along with investment and recovery of the commodity of prices. In terms of export, India is vulnerable and has grappled to attain a 2 percent share of the global export in US dollar terms, with its share fluctuating around 1.5-1.7 percent between 2010 and 2018. Its share of top high-value traded goods also remains poor. 

  World ($bn) India ($bn) India’s share in %
All Products 19,346.60 323.06 1.67
Electrical machinery and equipment and parts, sound recorders, television 2.779.68 11.79 0.42
Mineral fuels, mineral oils and products; bituminous substances; mineral waxes 2,506.62 48.29 1.93
Machinery, mechanical appliances, nuclear reactors, boilers 2,277.45 20.40 0.90
Vehicles other than railway or tramway rolling stock, and parts and accessories 1,534.86 18.24 1.19
Plastics and articles and thereof 656.18 7.84 1.20
Natural or cultured pearls, precious or semiprecious stones, precious metals 652.39 40.10 6.15
Optical, photographic, cinematographic, precision, surgical instruments 613.80 3.21 0.52
Pharmaceuticals products 587.49 14.28 2.43
Organic chemicals 444.65 17.74 3.99
Iron and steel 422.71 9.98 2.36

Source- UN Comtrade International Trade Statistics Database

Investment plays a crucial role in economic growth since it is a component of aggregate demand (AD) and more importantly influences the productive capacity of the economy. According to the Centre for Monitoring Indian Economy (CMIE), India’s trade deficit narrowed to USD 11 billion in October 2019 compared to USD 18 billion in October 2018. The reason behind the narrowing trade deficit is steeper fall in India’s imports compared with a fall in exports. Exports fell for the third straight month in October, recording a y-o-y contraction of 1.1 percent. Imports witnessed its worst decline in over three years to record a fall of 16.3 percent in October.

The current BJP regime has a massive mandate and the now expectations of a common man are much higher but somehow the economic slowdown also costs BJP, losing state elections in Jharkhand and Maharashtra. The political grip of Modi led right-wing party is losing its momentum facing the fears of more damage in the future. The government’s drastic measures to fix the desire or misshaping the courses of events won’t serve to motivate shopper certainty. Individuals are down to earth and patient if they understand the time it will take to come out of the current situation. They know there are no alternate ways to come out of slowdowns.

The government must take some immediate steps to revive the sinking economy together with some changes in the rigid policies which are diverting the interests of investors. For the quicksilver change, the state should provide incentives to the automakers so they can invest and shift to electric vehicles. The rigorous GST collection of companies below 1 crore is contracting the slowing economy, especially impacting the exporters, it must be changed from monthly to quarterly until the things get better. It is high time for public sector banks to change the credit culture in both process reforms and behaviour change as the existing credit flow system is a major factor of economic downturn. By improving the credit flow in both consumer and industry will boost the investment and by bringing the cost of land down will ultimately help in the infusion of the economy. “The impact of higher oil prices and the depreciating rupee has already damped consumption demand. The liquidity crunch in the system is putting further pressure on growth,” said Soumya Kanti Ghosh, State Bank of India’s group chief economic advisor.

The views reflected in the article are the opinions of the author in a personal capacity and do not reflect the views of his employers.

Saurabh Dwivedi
Author is Programme Assistant at the Indian Council For Cultural Relations (ICCR), New Delhi, India.

3 replies on “Will Indian Economy Recover From Slowdown or Just Worsen?”

I was extremely pleased to uncover this site. I want
to to thank you for your time just for this fantastic read!!
I definitely enjoyed every bit of it and I have you book
marked to look at new things on your site.

It’s a shame you don’t have a donate button! I’d certainly
donate to this fantastic blog! I guess for now i’ll settle for bookmarking
and adding your RSS feed to my Google account. I look forward to new
updates and will talk about this site with my Facebook group.
Chat soon!

Leave a Reply

Your email address will not be published. Required fields are marked *