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GS-3||Economy|| Structure of the Indian Economy||National Income & its measures

What is the Issue?

India is at a critical stage in terms of its economy with increasing fiscal deficit and growth not happening at the required levels.

Detail

The crisis brewing within the Indian economy has gained unanimous acceptance by now. Even the latest annual report of the RBI for the fiscal year 2018-19 (or FY19) confirmed that the Indian economy has indeed hit a rough patch.

by now. Even the latest annual report of the RBI for the fiscal year 2018-19 (or FY19) confirmed that the Indian economy has indeed hit a rough patch. The GDP growth rate of the economy has slipped to 5 percent in the first quarter of FY20, the lowest in over six years.

the lowest in over six years. This is an indication of tougher times ahead. Be it the recent collapse of the automobile sector or the rising number of non-performing assets (NPAs), sluggish consumer demand or failing manufacturing sector; all have a hand in this deceleration of growth rate.

Housing sales

As per Liases Foras , a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a jump of 7% from March 2018 , when the number was at 1.2 million.

, a real estate research company, India’s top 30 cities had 1.28 million unsold housing units as of March 2019, a , when the number was at 1.2 million. This means that builders are building new houses at a faster pace than people are buying them.

The real estate sector has forward and backward linkages with 250 ancillary industries . So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too.

. So, when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well too. This is something that isn’t happening currently. The fact thatreal estate prices haven’t gone up in years makes people feel less wealthy and as a result, spend less.

Automobile sector and Job losses

The spurt in instances of job losses from automobile manufacturers to biscuit makers has led to the general acceptance of the downturn.

This is the third instance of an economic slowdown for India in the past decade after the ones that began in June 2008 and March 2011. The technical term for the same is a growth recession.

for India in the past decade after the ones that began in The technical term for the same is a growth recession. A recession is defined in economics as three consecutive quarters of contraction in GDP . But since India is a large developing economy, contraction is a rarity.

. But since India is a large developing economy, contraction is a rarity. A growth recession is more commonplace where the economy continues to grow but at a slower pace than usual for a sustained period, what India has been facing nowadays.

Non-oil non-gold non-silver imports

This is a good indicator of consumer demand as it indicates when people buy more imported goods. From April to June 2019, these imports fell by 5.3%, the biggest contraction in three years. They had risen by 6.3% during the same period last year.

Bank retail loans

This data point goes against the trend. From April to June 2019, the retail loans of banks grew by 16.6% in comparison to the same period last year. During the same period last year, they had grown by 9%. There has been a marginal fall in growth. Housing loans form more than half of the retail loans—they grew by 18.9% during the quarter against 15.8% last year.

The consumption matrix

Consumption is the most important part of the Indian economy, given that it forms around three-fifths of the Indian economy. And any slowdown here is bound to affect the overall economy.

And any slowdown here is bound to affect the overall economy. Except for perhaps retail loans given by banks, there is a contraction in all other parameters which measure consumption in different ways.

Investment Side

The private sector, in its reaction to the economic slowdown, has lost confidence and is investing less.

An RBI report suggests that business confidence, consumer confidence, and capacity utilization are down.

suggests that business confidence, consumer confidence, and capacity utilization are down. The government thus has to garner resources and give a boost to the economy by increasing its investments.

Tax Revenue Side

In 2018-19, tax revenue was short by about 1.5 lakh crore.

Certainly, the revenue shortfall for the Centre will be even larger than last year when it was around 2 lakh crore.

How does Revenue shortfall affect states?

The States get 42% of the tax revenue, and so they will get 84,000 crore less this year.

and so they will get Further, the concessions in corporate taxation of 1.45 lakh crore will also mean Rs. 58,000 crore less revenue for the States.

How will states manage?

With the current GST structure, revenue from indirect taxes cannot fill the resource gap of the states.

The Centre is required to give the States their share of Integrated Goods and Services Tax (IGST).

It should also compensate the states if the revenue growth of State Goods and Services Tax is less than 14%.

Challenges

The dilemma is that if the GST rates are increased, prices would rise and demand would further slump.

Inflationary moves and demand would fall.

The problem is compounded by the shortfall of indirect tax collections.

The concessions to the corporate sector have narrowed the fiscal space available without raising demand.

Way ahead

Increasing Government investments.

The government should cater to the needs of the unorganized sector where the problem actually originated from.

of the The fiscal deficit at all levels of government is already high, so a policy decision is needed on how much more it can be.

References