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Indian Economy Passing through A Phase of Economic Slowdown

In simple words, a cyclical economic slowdown is a part of the business cycle having its peaks and troughs

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While there is a consensus that the economy is slowing down, the debate is still going on whether the slowdown is structural or cyclical. Pixabay

The Indian economy is passing through a phase of economic slowdown, with the GDP growth registering one of the lowest rates of 5.8 per cent in the last quarter of FY19. The GDP growth rate for the first quarter of FY20 is feared to be lower than 5.8 per cent. While there is a consensus that the economy is slowing down, the debate is still going on whether the slowdown is structural or cyclical.

In simple words, a cyclical economic slowdown is a part of the business cycle having its peaks and troughs. The economy will be moving in cycles with periods of peak performance followed by a downturn and then a trough of low activity. These are expected to be short-term problems that could be addressed with an adequate mix of fiscal and monetary policies.

On the other hand, sometimes the problems of the economy can go deeper, impeding the efficient and fair production of goods and services. In such a scenario, a monetary and fiscal stimulus won’t be enough to revive the economy. Fixing such problems would require the government to undertake some structural policies. The best example in this regard would be the reforms that were carried out to address the crisis in 1991.

Now, the question is whether the Indian economy requires structural policies or a stimulus package through monetary and fiscal policy. We can analyse the performance of various indicators that would help us in assessing whether the slowdown is cyclical or structural. The economic growth of any country is driven by a virtuous cycle of savings, investment and exports. Of all the three, investment is considered to be the key driver of growth. To quote the Economic Survey (2019), investment, especially private investment, is the ‘key driver’ that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.

Indian, Economy, GDP
The Indian economy is passing through a phase of economic slowdown, with the GDP growth registering one of the lowest rates of 5.8 per cent in the last quarter of FY19. Pixabay

The investment rate as measured by Gross Fixed Capital Formation (GFCF) as a per cent of GDP is showing a declining trend. GFCF as a per cent of GDP has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018. Similarly, if we consider the GFCF in the private sector, it declined from 26.9 per cent in 2011 to 21.4 per cent in 2018. Likewise, the new investment projects that were announced in 2011 stood at 5,882, whereas it declined to 3,708 in 2018. On the other hand, the investment projects that were dropped off in 2011 were 945 and it increased to 2,142 in 2018.

A similar declining trend is also evident in the case of gross domestic savings as a per cent of GDP. It declined from 32.7 per cent in 2011 to 29.3 per cent in 2018. During the same period, exports as a per cent of GDP also declined from 24.5 per cent to 19.6 per cent. Thus, the performance of all the three indicators considered to be the major ingredients of a growth story was not satisfactory.

Another major area of concern that is also contributing to the declining savings in the economy is wage growth. The economy is experiencing a declining wage growth (both rural and urban wages). Rural wage growth has declined from 27.7 per cent in FY14 to less than 5 per cent in FY19. The corporate wages have also exhibited a single-digit growth in FY19 compared to a double-digit growth a few years back. The declining wages could also lead to a slowdown in consumption, which is what the economy is experiencing now.

All the sectors, especially the auto sector, is passing through a crisis like situation due to the declining sales. The declining sales and piling inventories are forcing companies to cut down production. The cutting down of production can have repercussions in the job market. For instance, the unemployment rate was 5.6 per cent in July 2018, whereas in July 2019 it was 7.5 per cent.

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Further, the inflation rate in the economy has declined from 10.03 per cent in FY13 to 3.41 per cent in FY19. The low inflation rate would be a relief to the consumers, but a prolonged period of falling prices is not good news for the economy. Low inflation rate depicts weakening of demand that would discourage fresh investments and job creation.

The slowdown in the economy was further aggravated by the NBFC crisis triggered by the IL&FS default. The NBFC crisis led to a liquidity crunch that further worsened the situation in the economy. Liquidity crisis negatively affected the companies that were plaguing with lower sales. For instance, according to the letter written by the SIAM to the Finance Ministry, 70 per cent of two-wheeler sales and 60 per cent of commercial vehicles sales are financed by the NBFCs.

Considering the performance of the above indicators, it could be inferred that the slowdown in the economy is more than a cyclical one. The structural factors contributing to the slowdown is evident from the fact that the successive rate cuts by the Central Bank have not yielded the desired results. The limited fiscal space prevented the government from announcing any stimulus package in the budget. However, even if the government had gone for a fiscal stimulus it could have only a limited impact in addressing the present crisis.

Indian, Economy, GDP
The GDP growth rate for the first quarter of FY20 is feared to be lower than 5.8 per cent. Pixabay

The liquidity crisis in the economy could be a cyclical issue, and the policy response from the RBI and the government would help in addressing the issue. Nevertheless, the IL&FS default was also a result of the delay in the rolling out of various infrastructure projects. The situation calls for simplification of the land acquisition laws in the country. The IL&FS crisis indicates that the country requires more reforms.

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Though the present situation in India is not similar to that in 1991, the slowdown is indeed worrying. There is a need to unleash a fresh set of reforms that would help India to achieve the target of a $5 trillion economy. (IANS)

Next Story

Australian Economy Could be Hit Hard by the Coronavirus

Know how coronavirus can have a negative impact on the Austalian economy and entertainment industry

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Australia economy coronavirus
According to economists, Australia could lose as much as $1 billion due to coronavirus outbreak. Pixabay

The outbreak that originated in Wuhan, China has quickly caused a crisis across the world. The virus has already been announced to pose a worldwide threat, but the biggest risk groups are the countries located close to China.

The toll has not been limited to those infected by the virus. The entire economy of the world is currently going through a major change, since China and its neighboring countries, including Australia, are such important players in the world trade. All the flights going in and out of China have been canceled and traveling, in general, has become much more dangerous, hence much less popular. The scope of the damages caused by the coronavirus has already stunted the economy of the region.

Economic losses for Australia

According to economists, Australia could lose as much as $1 billion due to this outbreak. The tourism sector has taken the biggest hit with these changes. The outbreak happened during the Chinese New Year, which is usually a huge time for international travel, but because of this outbreak, the traveling is limited, causing the countries that usually see a lot of action in ticket sales, a major loss. Even though 99% of coronavirus cases are registered in China, there are some singular cases outside of the country, in Australia as well, so the traveling is actually quite difficult, with some airlines completely shutting down their flights to prevent the virus from spreading.

Australia economy coronavirus
The outbreak has affected the businesses and services that operate in public areas, but most of all it is the entertainment industry in Australia that has suffered. Pixabay

What is also affecting China is that they have suspended all the trading, and for a lot of countries, especially for Australia, for which China is an extremely important trading partner, the access to a lot of imported goods has been limited.

The world has experienced outbreaks of a similar scale two times, during the swine flu (H1N1 Flu) in 2009, and SARS 2003, also originating from China. But this time around, having had experience with SARS, China reacted much more quickly than in the previous case, hopefully ensuring the better prevention of international contamination, but coronavirus is difficult to diagnose because it does not immediately show up, with varying symptoms, so a person could be carrying a virus without even knowing it for two weeks.

The effects on the entertainment industry

The outbreak has affected the businesses and services that operate in public areas, but most of all it is the entertainment industry that has suffered, because amidst the outbreak, not only do people have no time for these kinds of activities, but also most of them require being around a lot of people in smaller spaces.

Australia economy coronavirus
What is also affecting China is that they have suspended all the trading, and for a lot of countries, especially for Australia, for which China is an extremely important trading partner, the access to a lot of imported goods has been limited. Pixabay

Australia has one of the most famous gambling scenes, with two outstanding leaders in this industry located there, The Crown and Star, who rely on rich gamblers coming in from China.  So as on mainland China it is illegal to gamble the VIP gamblers come in Australia to get access to online gambling for real money and play here online pokies games. These establishments are already experiencing huge losses. The USB forecast even went on to say that these casinos will likely see a 50% drop in their income because of the outbreak. These casinos are a tourist destination as well, and considering the dangers that come with flying in the regions around China, these casinos are bound to have a pretty rough quarter.

The airline companies will also experience huge losses these following weeks and since we don’t know whether there will be a solution anytime soon, and how bad the coronavirus can get, these estimations could really grow, causing even bigger disruptions. The exact numbers could change in a matter of weeks, depending on how the virus behaves, but one thing is clear, the outbreak has greatly affected the economies around the world, and especially in the region. Australia is already recovering from the terrible bushfires that have destroyed a lot of Australia’s wildlife and facilities.

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Now in addition to that, the country is experiencing the consequences of the virus outbreak and is feeling the results of the outbreak on its economy and financial sector, with tourism and entertainment, two for the huge parts of the Australian economy, taking the biggest hit.