GDP Slowdown?

In yet another blow to the economy, the GDP growth rate for the second quarter of 2019 clocked in at 5 % which was way below the already low expectations of 5.6 – 5.8%. This has been the 6th straight QoQ fall in the GDP Growth Rate after its peak of 8% in January 2018.

The nature of this slowdown still is definitive though. The RBI, in its recent report, defined the slowdown as a cyclical slowdown rather than a structural one, alothough experts suggest that structural reforms might also be needed. This turns the slowdown into a part – cyclical and a part – structural one. The cyclical slowdown isn’t as scary as the structural slowdown though. In order to tackle the Structural Slowdown, India does need some serious changes. Analysts also expect a set of further fiscal stimulus to help the revival process.

Private final consumption expenditure fell to its 18 quarter low whereas the Govt. Capital Expenditure fell 28%. This was caused mainly due to the restrictions imposed on announcement of new projects during the 2019 Lok Sabha Elections. Despite being counted as the most expensive elections in the world, even this wasn’t enough to help boost expenditure.

The slowdown is caused mainly due to a slowdown in the core sectors of the economy such as manufacturing, automobile, etc. The NBFC sector, also currently recovering from its recent liquidity crisis, is another deterrent which needs to be worked on. GST Collection for the month of July fell under Rs. 1 Lakh Crore once again indicating a slump in consumption. The slowdown in the manufacturing sector can be seen shifting towards the service sector as well. Unemployment rose to 7.51 % from 5.66 % in the previous year. All these facts do not reflect well upon the economy. Mr. Subramanian Swamy, criticising the Government for the lack of a “new economic policy” to get to the $5-trillion economy mark.
stated, “Every indicator by the government’s own statistics is negative and macros have gone into a tailspin, heading for a crash.”

Be it the recent PSB Mergers or their re capitalization, rolling back taxes on  Foreign Investments, LTCG and Angel Investors, the Govt. is seen to have been taking measures to boost growth and consumption but proper implementation is what is required to recover from the current slump. The recent announcements by the Govt. of allowing 100 % FDI in the coal mining sector and easing rules for contract manufacturing and single brand retail all have been welcomed well by both domestic as well as foreign investors. All these facts tell us that the government is doing all it can to revive the economy. In addition to a number of stimulus measures introduced by the Finance Minister, the RBI is also supporting the Government in its endeavor.

In its August Policy Meet, the RBI slashed the Repo Rate by 25 bps to help boost consumption expenditure. Analysts expect further rate cuts to the extent of 25 bps in October and a total of 65 bps by the end of FY 21. The Reserve Bank also paid out a dividend pf Rs. 1.76 Lakh Crores this year. In a statement, the Finance Minister said that all options of utlising these funds are on the table indicating that a definitive conclusion hasn’t been reached yet.

Although these measures have been introduced, their implementation and effect on the economy are yet to be seen. All these measures and fiscal stimuli will bear no fruit lest they are implemented properly. Re capitalization does not provide much help because bulk of the proceeds are used to Write off losses, bad loans, NPA’s etc, and therefore, the real objective of the money reaching the common man through banks is not fulfilled. Such band aids aren’t going to help.

The government is trying to step up its game to help boost the economy, but how their plan turns out to is yet to be seen. We do not know how long can the government keep covering up wounds with such band aids, but, the economy is in dire need of major reforms which will help the Government reach its target of a $ 5 Trillion economy.