[Answered] Examine whether current economic slowdown is a structural or cyclical in nature. Give some solutions to move economy out of doldrums.

Demand of the question
Introduction. Contextual Introduction.
Body. Economic slowdown structural or cyclical?
Conclusion. Way forward.

A cyclical slowdown is a period of weak economic growth that occurs at regular intervals. While a structural slowdown, is a more deep-rooted phenomenon that occurs due to an off shift from driven by disruptive technologies, changing demographics, and/or change in consumer behaviour. A slowdown in consumption demand, decline in manufacturing, inability of the Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner, and rising global trade tension and its adverse impact on exports are some of the factors affecting India’s growth.

Economic slowdown structural or cyclical?

  1. Consumption: Private consumption contributes nearly 55-60%, to India’s GDP has been slowing down. While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.
  2. Savings: Savings by household sector which are used to extend loans for investment have gone down from 35% (FY12) to 17.2% (FY18). Since households are the only net savers in the economy, their savings are major contributors towards investment. These savings have now reached to a level which isn’t adequate to fund the government borrowings, adding to current economic slowdown.
  3. Investment: Gross Fixed Capital Formation (GFCF), a tool to measure investment in the economy has declined from 34.3% in 2011 to 28.8% in 2018. Similarly, in the private sector, it has declined from 26.9 per cent in 2011 to 21.4 per cent in 2018. The household sector, which is the biggest contributor to the total capex in the economy, has lost steam since demonetisation.
  4. Failure of the Insolvency and Bankruptcy Code (IBC): IBC has met limited success. It has been unable to resolve insolvency Cases in a time-bound manner. Therefore it has led to limited resolution of Non-performing assets and cases.
  5. Rising global trade tension: Recent trade war between USA and China and other global trade wars has impacted growth all over the world. It has impacted manufacturing and exports in different parts of the world, impacting Indian economy too.
  6. Unemployment: Unemployment is all time high and has impacted the buying ability of individuals. Usher of new technologies, bad policies and inability of manufacturing sector to boost up the growth has impacted overall growth of the country.

Under the current macro environment, monetary policy seems to be less effective than fiscal policy as ‘improper transmission mechanism’ fails to pass on benefits to the real economy. A broad-based downturn in several sectors, including manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture, and call for actions in terms of monetary and fiscal policies, along with deep-seated reforms for the structural slowdown. There are structural issues in land, labour, agricultural marketing which need to be addressed.

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