Is the Indian Economy Slowing Down?

Economy | Published on 29th February 2020 | 1218

Is the Indian Economy Slowing Down?

India’s Stalling Economy in 2019

India’s GDP growth has decelerated for the last 8 months. However, experts would argue that it’s been slowing down since the middle of 2018. In the April to June quarter of 2019, growth in India’s GDP grew by 5%. This number had been anticipated by experts as India’s economic growth has been stalling for the past few years. For reference, this percentage is the lowest India’s GDP has grown in 6 years. In the same quarter of the prior year, the growth was 8%. Two years before that, in 2016, the growth was 9%.

Experts have their thoughts on the matter. According to Madhavi Arora, the lead economist for Edelweiss Securities, the deceleration in growth is a reflection that the economic slowdown is now beyond a critical state. Arora states that policymakers must acknowledge and deal with the constraints to slow down economic growth. Beyond the comments of experts, there are other factors that suggest that India’s economy may be struggling.

According to an article in the South Asia Brief, India’s rate of unemployment stood at around 7.5% in November. The participation rate from the labor force also hit a record low of just 42%. Due to more than half the labor force being out of work, experts have assumed that consumer demand may have declined. Without the necessary demand, manufacturing products, investing in companies, and the creation of more jobs stalls.

How the government Responded to the GDP in 2019

However, there seems to be a glimmer of hope among experts too. Certain experts argue from the perspective that the Indian economy will improve with new governmental reforms that have been incorporated a few months ago. Here are some of the measures put in place by the government towards the end of 2019.

  • To combat the dragging GDP, corporate tax rates were dramatically slashed by the Indian government since the month of September last year.
  • The Indian government also began working on infrastructure plans that are worth ₹1 trillion with a target to invest up to ₹3 trillion in these plans.
  • In the financial sector, 2019 was also the year in which RBI or the Reserve Bank of India dramatically reduced its chief lending-rate by a gross 135 ‘basis points,’ which was good for business borrowers.
  • The government has also provided banks with extra capital to accommodate the slog in the GDP.
  • Lenders now have extra protection with new bankruptcy rules initiated by the government.
  • Finally, the government has consolidated state-owned institutions which tend to dominate the sector.

Positive Outlook for the Future of India’s Economy

Experts also have a positive outlook with regard to the Indian economy after these reforms. The head of South Asia’s economic research team at SCB (Standard Chartered Bank), Anubhuti Sahay, called the new and improved GST (goods and services tax) “green shoots in India’s slowing economy.” In addition to reforms, Sahay is optimistic about the impact of the stricter GST collections, the growth in car sales over 2019, and the manufacturing PMI data on the Indian economy.

In fact, Sahay suggests that India’s GDP growth will begin to rise again post-2020. Her forecast is that it will grow by 6% in 2021 and steadily rise with the maintenance of the aforementioned reforms. She suggests that the central government should further reduce the liquidity stress within the country by implementing land and labor reforms. Her recommendation is that the government also make education more accessible, improve the health of its citizens, and develop their skills to advance the economic growth of the country.

A more realistic outlook towards developing land and labor reforms has also been put forth by experts. Some experts suggest that the government will struggle with these particular reforms due to a combination of social factors. Labor reforms may not be implemented successfully due to the record unemployment rate currently with the country. Additionally, land reforms will struggle to make a difference as there are issues regarding the dwindling farmlands across India, the right pricing for goods and services, and ownership of land which is not being utilized.

Hence, the overall consensus seems to be that India’s economy has been haphazardly slowing down for the past few years. However, the government seemed to react quite dramatically to the reduction in economic growth in 2019. Some experts believe that the government reforms have been aggressive enough to forecast a reversal in the direction of India’s GDP growth in 2020. However, the degree of change will not be drastic. Other experts think more land and labor reforms are necessary but will be harder to implement due to the preexisting social issues from a dragging economy.