Economic crisis: economy in bad shape

ECONOMY

TOPIC: General Studies 3:

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Economic crisis: economy in bad shape

Context:

• 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.

Stagflation:

• 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)

Daily Current Affairs IAS | UPSC Prelims and Mains Exam – 30th December 2019

SRC: Wall street

Concerns:

• 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

Way forward:

• 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

Conclusion:

• 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?