TOPIC: General Studies 3:
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Economic crisis: economy in bad shape
- Growth in the quarter from July to September had slipped to 4.5%.(lowest level recorded in six years)
- 6.1% nominal GDP growth (real growth plus inflation) the slowest in a decade.
- Fixed investment slumped to 1%, private consumption growth halved year on year, and manufacturing activity contracted by 1%.
Evidences for Slowdown:
- The 12.2% decline in electricity generation( it is a good barometer of demand generated by all economic activity, not just industrial production.)
- Metrics one would usually look at to assess economic activity and consumption such as Imports, merchandise exports, automobile sales, bank credit…, are indicating warning
- Bank credit growth is expected to hit a 58-year low in 2019-2020.
- With retail inflation hitting a 40-month high of 5.54% in November and Food inflation hit 10%, vegetables (onions) and pulses.
- This has led to worries about India entering a phase of stagflation, (persistent high inflation combined with high unemployment and stagnant demand in a country’s economy)
- The current slowdown is closer in nature to what was faced as far back as 1991 — the year India liberalised.
- India’s current crisis is driven by both cyclical and structural factors
- Problems in finance have exacerbated the slowdown.
- The World Bank has said this cyclical slowdown is severe.
- Demand collapsing due to reasons ranging from poor rural income growth,
- The ghosts of demonetisation and a hastily implemented Goods and Services Tax (GST).
Point to be noted:
- India’s growth recovered after global financial crisis 2008 without fixing the problems
- Series of fortuitous developments such as lower oil prices and a boom in credit from non-banking financial companies (NBFCs) which may be partly driven by demonetisation sending more cash into the formal financial system.
- With the collapse of IL&FS in late 2018,this support also ended .
- Now the twin balance sheet crisis (of stressed banks and corporates with infrastructure bets) raised
- Reserve Bank of India must cut interest rates for spurring growth out of the equation.
- Increase public expenditure by investing in agriculture
- raise funds for the Mahatma Gandhi National Rural Employment Guarantee Act
- Investment in Skill , Education and Health
- This is a cyclical phenomenon and will pass like the circle of life… what goes up, must come down, but govt must also address the concerns of economy
Connecting the dots:
- Do you think economy seems headed for the intensive care unit?
- Do you think Demonetisation is responsible for the current slowdown?