Understanding the slowdown: 

Understanding the slowdown

Context:

  • Causes responsible for the slowdown of Indian economy

What are the issues?

  • There is a slowdown in Indian economy
  • The GDP has lost momentum
  • The reasons of slowdown are being explained as beyond the government’s control; that are deficient rains, the sluggish world economy, recent demonetization in the economy and Goods and Services Tax (GST)
  • Both the GST and the demonetization failed to bring change in the numbers

What are the four engines of the economy?

  • Exports, government investments, private consumption, and private investments

What has happened to the four engines?

  • During the United Progressive Alliance’s (UPA) tenure – the four engines powered the economy
  • Growth in government investments and private consumption remained on the track until it has started slowing down in the quarter ending June 2017
  • Exports and private investments have lost momentum

What is the background?

  • Government investments and private consumption depend on how well the economy is doing
  • As incomes improve, private spending and tax collections pick up.
  • The 2008 financial crisis was a big blow to the export business including India
  • Recovery in the global economy has lifted exports of most Asian countries
  • Indian export remained stagnated after the crisis
  • The overvalued rupee eroded the competitiveness of Indian export

What are the challenges?

  • The steps taken for improving the ease of doing business and the foreign investments regime have proved insufficient in restarting the private investments cycle
  • The share of investments in GDP GDP has declined steadily for the past five years.
  • New jobs are not created
  • Without new jobs, consumption will only grow up to a point
  • India’s economic future can improve significantly with investments-led growth

Why are investments on hold?

  • The returns-risk projections of projects are not favourable
  • Companies are not convinced that new factories will be sufficiently profitable
  • The government is politically sensitive
  • The government has set a low target for consumer price inflation
  • The government is unable to progress on land and labour reforms
  • Government’s policy on the bad bank has impacted small companies in raising finance
  • The environment of constant shocks and unanticipated policy changes is hurting investment sentiment in the economy

Whom to be made responsible?

  • There is no policy paralysis
  • Decision-making is speedy which demonstrates the growing disconnect between policy tools and objectives
  • The demonetization has dragged the slowing down economy
  • The complicated design of the GST may have added to the vulnerabilities of the informal sector
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