INDIA'S ECONOMIC SLOWDOWN AND THE DROPPING GDP

AUTHOR- DHWANI SHRIVASTAVA*

EDITOR-PRAKHAR VISHWAS MISHRA




INTRODUCTION

A country's economy is generally the major factor determining whether the country is a developed, developing, or underdeveloped. Now, to determine that something is known as 'total size of the economy' is measured using the Gross Domestic Product (GDP). GDP is the total monetary value of the goods and services produced in a country in a particular period. It determines the health and size of an economy and is considered an essential measurement or indicator to determine a particular country's citizens' standard of living.


Apart from measuring the health and size of the economy, GDP also helps the government frame policies for the country and support different investors in their decision-making process regarding the expansion of their businesses and investment in different economies of different countries. Everybody knows that our country's GDP is dropping gradually and that India is not in its best economic state right now, but do we know the genesis and the reasons behind it? In this article, we are going to have a little time travel and will also try to know the actual position of our economy and some ways in which it can be revived.


PAST TRENDS

The agriculture sector was the major contributor to India's GDP and contributed heavily to about 50% of the total value in the 1950s. It was also known as the backbone of the Indian economy. India was the mass producer and exporter of a variety of crops, including jute, cotton, wheat, rice, and a lot more, leading it to be massively involved in international trade, which, in turn, had a positive impact on economic growth. Then came a time when Western countries started to adopt the industrialization system; thus, we saw the rise of industries in India. Many upcoming and budding industries like packed food, animal food grabbed this opportunity and started flourishing. However, the tertiary industry's growth, also known as the service industry, has seen the real deal. The tertiary sector's GDP contribution was 29.2% in the 1950s and rose to 55.7% in 2007-2008.


The below bar graph shows the contributions of the agriculture, industry, and tertiary/service sectors in the country's GDP from the years 1960 to 2000.[i]


Source: (https://www.ieltsjacky.com/ielts-bar-chart.html)

PREVIOUS ECONOMIC SHOCKS (1991 AND 2008)

After independence, the Indian economy has been shaken majorly twice till now;

Once in 1991 and then in 2008:


1991:The major reasons for the ‘1991 economic crisis' were the poor economic policies prevailing at that time and the following trade deficits. The imports shot up, and the exports slumped, leaving the country in a situation of 'twin deficit meaning, that the current account deficit and the fiscal deficit happened at the very same time. Until July in the same year, there was a sharp depreciation in India's currency, which again exaggerated the 'twin deficit' problem. The problem was so severe that it was impossible to borrow even short-term loans, and eventually, the World Bank and the International Monetary Fund (IMF) stopped providing their assistance. With no option left, the Indian government had to airlift its national gold reserves to seek an economic bailout from the IMF.


During that time, the fiscal deficit of the government rose from 9% of the GDP in 1980-1981 to 10.4% of the GDP in 1985-1986 and 12.7% of the GDP in 1990-1991 and subsequently the debt rose from 35% of the GDP in 1980-1981 to 53% of GDP in 1990-1991.[ii]


However, the Indian government was quick to respond, and its immediate response was to borrow an emergency loan of 2.2 billion dollars from International Monetary Fund (IMF) by airlifting 67 tonnes worth of India's Gold Reserve as security. In continuation, RBI depreciated the value of the Indian rupee by 9% and further by 11% on the 3rd of July. To recover from the shock, doors for foreign investments were opened, and liberalization policies came into action.


2008: India successfully weathered the great financial crisis of September 2008. It was the time of the Global recession when India's trade with the other countries was not at a promising rate, which became a reason for the mild severity of the Indian economy's impact. India had the capability and was able to withstand this economic shock that had shaken several other economies.


PRESENT SITUATION

Recently, a tweet was posted by the official Twitter handle of the Bharatiya Janata Party on 22nd of August, 2020, according to which India's GDP growth in 2020 would have been the highest amongst the major economies of the world and was estimated to beat about 1.9%. However, according to the latest projections of the International Monetary Fund (IMF), India's growth rate for 2020 will eventually stand at -4.5%, i.e., in negative values. This is the first time after 1979 when India may have to face a negative GDP growth. Unfortunately, according to the data from the Indian government, this situation could get worse.


The growth figure of the GDP of quarter 1 of the year 2020 was -23.9%, which leads us to the fact that instead of performing the best, India's economy has performed the worst due to the pandemic of COVID-19.


Below is the graphical depiction of the GDP growth in April-June 2020 compared to April-June 2019 of some of the world's major economies.[iii]


Source:https://factly.in/data-is-indias-gdp-growth-rate-the-worst-among-major-economies-for-april-june-2020/

India's ex-chief statistician even doubted that this official figure might be an exaggerated figure of the actual GDP. This is the situation when the data has excluded the small companies and the informal sector, such as the street vendors, domestic workers, which were the ones who had suffered the maximum impact from the COVID-19 lockdown. The current pandemic magnified the pre-existing risks to India's economic situation. Those in the informal sectors and daily wage groups have been at the most risk. Due to a lack of funds, premature startups collapsed too.


To provide some relief, India's Prime Minister, Mr. Narendra Modi, on 12th May 2020, announced an economic package worth Rupees 20 lakh Crore that was valued at 10% of the GDP. India's growth in the fourth quarter of the year 2020 went down to 3.1%. Following were the outcomes or consequences of the COVID-19 lockdown on India's economy:

  1. The rapid increase in unemployment and loss of jobs

  2. The collapse of the tourism industry

  3. A sharp decrease in the government's revenue

  4. Stressed supply chains

The direct impact of the economy is on people's occupations, meaning that every 1% increase in the GDP would result in approximately 30 lakh people coming out of poverty.

Maruti Suzuki, India's largest automobile manufacturer, mentioned that they did not sell a single car in April 2020 in India.


GDP consists of 4 variables, namely, consumption, investment, government spending, and net exports.

  1. : Whenever the public buys something or spends money, it comes under 'consumption.'

  2. ConsumptionInvestment: Every time a business makes some investment by either starting a factory or expanding its activities, it comes under 'investment.'

  3. Government spending: Whenever the government spends money on building roads, bridges, etc., it comes under 'government spending.'

  4. Exports: The difference between total exports and total imports is known as 'net exports.'

During the pandemic COVID-19, neither the public nor the government had funds to invest or pitch in startups, therefore, the top three variables fell flat, resulting in a drop in the Gross Domestic Product. Due to the prevailing global economic panic, the exports were not great enough.

REASONS FOR THE DIPPING GDP:-

Now let us talk about the major reasons that are causing the slowdown in our GDP growth.

  1. Lack of financing: There are majorly two financing sources, namely, BANKS and NON FINANCIAL BANKING COMPANIES (NFBC). Currently, the banks' non-performing assets have been high due to past reasons or factors that are restricting them to lend money, whereas the NBFCs are themselves having liquidity problems. Due to lack of financing, the automobile and manufacturing industries to are in danger.

  2. Rapidly rising unemployment: According to sources, the Indian unemployment rate has been the highest in 2020 when compared to the past 45 years. Also, the private sector's salary growth has been the slowest in this decade. This forms a vicious cycle when no salary increase leads to low salaries, which, in turn, results in low spending, further leading to low revenue generation for the company, which, ultimately, is why the salaries are low.

  3. The government does not have enough money: If the government spends on infrastructure, then employment opportunities will increase, and it will also link to many other sectors and industries. However, the main problem here is that the government faces a serious cash crunch, majorly thanks to GST. The government used to earn more tax from the old tax regime than the GST. To cover the costs, the government is now risking the National Small Savings Fund by supporting the struggling PSUs.

  4. Global slowdown: Due to the US-China trade war, the global economy is suffering, leading Indian exports to drop.

  5. Private investment: With the consumer confidence falling, stagnant levels of salary, lack of finances, no company are willing to expand, and neither foreign investments have been seen. From April to June 2019, the value of new projects has dropped by 79%. India's growth is falling from 4 consecutive quarters.

Currently, India is not in a recession; instead, it is in a growth recession. A recession is a contraction in the business cycle when there is a general decline in the country's economic activities and generally occurs when there is an adverse demand shock.[iv]


Whereas a growth recession is associated with minimal price inflation because many people are out of work and may have to curtail their spending, and as a result, inflation will remain low. The above mentioned were the reasons responsible for the slowdown of GDP growth. Further, we will look at the ways or the solutions that can be taken into action to improve the situation.

Solutions:-

There are two types of economic slowdowns, namely Cyclical slowdown, and Structural slowdown:

A Cyclical slowdownis the one in which the economic activity is lean and occurs at regular intervals of time. Such slowdowns last over the short-to-medium term and are based on the changes in the business cycle. Generally, interim fiscal and monetary measures, temporary recapitalization of credit markets, and need-based regulatory changes are required to revive the economy.


A Structural slowdown, on the other hand, is a more deep phenomenon that occurs due to a one-off shift from an existing paradigm. The long term lasting are driven by disruptive technologies, changing demographics, and/or change in consumer behavior.


India's real or inflation-adjusted gross domestic product (GDP) grew at 5% in the June 2019 quarter of the financial year 2019-20 (Q1FY20), the slowest growth in six years (25 quarters).


In nominal terms, the growth stood at 7.99%, the lowest since December 2002. With this, fears of the slowdown being a more structural one than a cyclical one have surfaced.[v]


India is in the middle of a sharp growth slowdown, but the debate should be that it is ita structural slowdown or a cyclical one. First of all, the government and the authorities need to determine whether it is a structural or cyclical growth slowdown. Further, they should take recovery steps. Some of the below-mentioned steps and ways can be taken into account :


1. The government should either outsource or personally collect data in the form of surveys and questionnaires, after which the data should be properly analyzed.

2. Short term measures are needed to be undertaken at the very moment to at least stop the economy from further going down.

3. Another step can be that instead of increasing exports, the government should focus more on reducing its imports. This will support the country's small manufacturers, and the Indian currency will be prevented from going out and eventually will benefit the country's economy.

4. The banks and the financial sector, in general, need bold reforms and changes to fix the slowdown.

5. More loans should be provided to the farmers, and heavy reforms in the agriculture sector are required.

6. A major boost is needed in the manufacturing sector.

7. Cutting down the corporate tax for the businesses.


Before Covid times, the growth of the Indian economy was on the positive side and was growing at a steady pace. Due to some unfortunate events, including the US-China trade war and the pandemic of COVID-19, the economy had to go through large ups and downs (downs and only downs, to be precise). Nevertheless, now the government is taking several measures to revive the Indian economy. It is expected that the economy will soon return to its high growth trajectory. The government is improving the policies and has also announced a relief package of Rs 20 lakh crore that has given some hope to the people and the public.


Famous American politician Ronald Reagan said an exciting yet true phrase –

"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. Furthermore, if it stops moving, subsidize it."


In the end, I will say, we all need to have optimism. After all, the ultimate resource in economic development is people. It is people, not capital or raw materials, that develop an economy.

REFERENCE

[i] "How To Write an IELTS Bar Chart Essay," last accessed (January 12, 2021)https://www.ieltsjacky.com/ielts-bar-chart.html

[ii] "1991 Indian economic crisis", last accessed (January 12, 2021) https://en.wikipedia.org/w/index.php?title=1991_Indian_economic_crisis&oldid=995563963

[iii]Bharath Kancharla, "Data: Is India's GDP growth rate the worst among major economies for April-June 2020?", last accessed (January 11, 2021)https://factly.in/data-is-indias-gdp-growth-rate-the-worst-among-major-economies-for-april-june-2020/

[iv] "Recession", last accessed (January 12, 2021) https://en.wikipedia.org/w/index.php?title=Recession&oldid=995376209

[v]Nikita Vashisht,“Cyclical or Structural – What Is the Nature of India's Economic Slowdown?”, last accessed (January 11, 2021)https://thewire.in/economy/cyclical-structural-nature-india-economic-slowdown

*The Author is a 1st year B.B.A.LLB (Hons) student at Vivekananda Institute Of Professional Studies (VIPS), IP University, Delhi

Disclaimer: The opinions and views in this article are personal and independent opinions of the author. VAIDHA doesn't hold any liability arising out of this article.

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