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Indian Economy - Recession or Slowdown?

Updated: Oct 17, 2019


GDP growth rate of India for the first quarter of 2019-20 was reported at 5%, the lowest since 2013. A less than 5% GDP growth was last witnessed in 2012-13 on account of what is known as policy paralysis. The current slide in GDP growth is a result of interspersed policy decisions like Demonetization, GST, RERA, IBC etc. coupled with International tensions like continuing political issues in Iran and trade war between America and China. The very recent development is the attack on Saudi Aramco oil facility thereby surging the oil prices. Irrational lending by banks during 2006-08 which resulted in an estimated Rs 12 lakh crore of stressed assets in the country’s banking system is also to be blamed. These in turn had a negative impact on the real estate sector which was already distressed as a result of the Asset Price Bubble and the automobile sector. The worry lines of the economy are sharp slowdown in private consumption that accounts for two-thirds of India's GDP, low domestic and global demand and negligible growth in manufacturing GVA (0.6% in Q1 of 2019-20 compared to 12.1% in Q1 of 2018-19). Jobs have been lost in huge numbers. According to the Centre for Monitoring Indian Economy (CMIE), the unemployment rate which was only at 3.37% in July 2017 sharply raised up to 8.19% in August 2019.

However, the cardinal issue is increasing import and decreasing manufacturing activity in India. That means, loss of job to Indian residents thereby decreasing the purchasing capacity, accumulated stock, further decreasing business and so on. Recent announcement of reduction in production by Maruti due to stock piling up is a live example.

Now the question is are we facing a recession? An economy is said to be in recession when there are two consecutive quarters of negative growth, but that has not yet happened in India. Morgan Stanley selected its first "fragile five" in 2013 in response to the global economic recovery. As a result of significant weakness in its currency, India was one among them along with Brazil, Indonesia, South Africa, and Turkey. However, as regarding the current situation, Morgan Stanley peg the economic growth at 6.2% in 2019 and at 7.1% in 2020. IMF projects GDP growth rate of 2019 at 7.3% and of 2020 at 7.5%. Stating an economy growing at 7% is at recession is absurd. India still stands as the third largest economy in terms of Purchasing Power Parity (PPP).

India is not in a recession but facing a serious slowdown in growth. Former RBI governor Mr. Y.V. Reddy expressed this slowdown to be partly cyclical and partly structural. The structural problems, especially in the land acquisition and labour reforms are to be properly addressed by the authorities.

RBI and Government shall take measures to strengthen the economy by building up infrastructure and by facilitating increase in the buying capacity. RBI has already reduced the interest rates many times. In the opinion of CRISIL chief economist Mr. DK Joshi, probably more interest rate cuts will be required. But according to Ecowrap, research report of SBI, “The current slowdown cannot be tackled by monetary policy in isolation, only a counter- cyclical fiscal response might address the core of the current problem”, and this opinion seems to be more realistic.

Finance minister Nirmala Sitharaman had announced a package of measures such as liberalising FDI for select sectors, rollback of a controversial tax surcharge on foreign portfolio investors, more capital for banks and NBFC’s, reduction of corporate tax rates and bank mergers. The problem is that most of these measures were aimed at increasing foreign and private investments but the question is whether these measures were sufficient enough to boost the purchasing capacity and to increase investor confidence in such a tailspin economy. The reduction in corporate tax rates resulted in a sharp rise of Sensex and Nifty and it can kick start private investment. The reverse trend reflected in stock market after a short while, again raises suspicion as to the effectiveness of the package announced by the Finance Minister. But, the corporate taxes account for around one third of total tax collections and its reduction will make the fiscal math further complex.

Another issue is that a total financial savings of only 9% is available for financing government deficit and private investment. It further deepens when Public sector borrowing requirements (PSBR), which is estimated at 9%, is considered instead of the fiscal deficit and generally PSBR is considered to be more credible than the fiscal deficit. There is no room for further fiscal stimulus. When already the Governments and PSU’s together swallow the household savings and still try to borrow further, it will result in crowding out of private investment, thereby affecting the fund availableto private sector. One possibility for fiscal stimulus is by carefully watching the public expenditure.

In the words of experts, possible measures to pull the economy out of this tailspin is capital creation for banks and NBFC’s, simplify GST, adopt ways to increase rural consumption, exploit the export markets opened as a result of US – China trade war, lower the interest rates on loans and create and execute a well defined plan for basic infrastructure development.


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Capital infusion into public sector banks and at the same time withdrawing money from RBI will definitely imbalance financial liquidity of the country in near future. Good analysis Vamsi. Keep going well.


Very resourceful, thanks for sharing. Neat work.


very informative,

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