How severe is the current stress in the Indian economy?

With the quarterly GDP data out, there is no doubt that the Indian economy has slowed down. The nominal GDP growth stood at 8% for Apr-Jun’19 quarter, 4% less than union budget expectation of 12% and the Real GDP growth at 5% which is the lowest in six years. Private Consumption Growth and investment rate have also dropped to 5%. Core sectoral growth has fallen to 2.1% and Manufacturing growth has touched 15-month low mark. The question arises here whether it is a temporary phase or there are some fundamental problems with the Indian growth story?

Impact of US-China trade war is an important factor while considering slowdown in the Indian economy. With the US tightening tariffs on exports from China, sentiments have gone down and the pace of the global economy has been hampered. World trade has been impacted and India is no exception. India’s export has declined by 3.7 per cent during the first quarter of FY’19-20. It has also contributed to less than expected growth of the economy, to a certain extent. Interestingly, the recent decline of rupee has contributed to an increase in India’s goods export and likely to support export growths in the coming quarters. Further depreciation of rupee could be instrumental in reviving exports but popular sentiments are against it, at the domestic front and it may irk the US in a china-like trade war. Lower interest rate regime could not be of help here as export finance interest in India is linked with international rates such as LIBOR and doesn’t impact from domestic interest rates.

For the last two decades, the major growth puller for the Indian economy was the constant expanding domestic demand. There has been a gradual shift towards consumption rather than savings. People were demanding and paying for a better lifestyle. But the dual shock of Demonetisation and hasty implementation of GST has impacted the unorganised sector severely. With almost stagnation growth in income of persons employed in the unorganised sector, consumption growth has cooled down. Rural households have impacted more than urban, due to their greater dependency on the unorganized sector for employment along with non-increasing agri-commodity prices. The slowdown of rural consumption has been indicated by slowed FMCG growth in last quarter. The agriculture sector is going to grow at a pace of 2-3% per year in real terms even with a favourable monsoon. The organised sector which is also pacing slowly is not able to replace the unorganised sector as an employer of manpower, any soon. This cause of the slowdown is somewhat sticky and here to stay unless properly acknowledged and corrected.

In the developed economies, booms and slowdown are more common than this part of the world. Economies face a period of rapid expansion followed by slow or negative growth periods and again start expanding. This cyclic kind of ups and downs are inevitable. Although painful, cyclic slowdowns are easier to handle than the more severe structural slowdown. Central Bankers around the globe, fight the cyclic downturns through monetary policies by lowering interest rates. But, structural downturns can not be cured this way. Structural downturns are results of a permanent change in consumption and enterprising behaviours, at large. With constantly declining propensity to save and behaviour to consume a greater portion of in-hand income in India, a structural downturn is more unlikely. Further, the inclination of young India towards startups is also a ray of hope. As evident, this downturn in the Indian economy is more cyclic than structural. Yet it does not mean that it will be corrected automatically. A push in the form of government expenditure is required in rural economy to fight the declining employment rate and support the growth story.

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