editorials

Updated: Sep 08, 2019 11:45 IST

I. How bad is the slowdown?

1. India’s gross domestic product (GDP) growth slowed to 5% in the quarter ended June. This is the slowest pace or growth since March 2013, when GDP expanded 4.7%. This is also not a one-off deceleration of the growth rate. GDP growth has been declining for five consecutive quarters now. This is only the first time since 1997 that we have had five consecutive quarters of declining GDP growth. If September quarter numbers turn out to be lower than 5%, we’d have six consecutive quarters of decline for the first time.

2. The current growth slowdown poses an additional challenge, especially for the government. This is because of a collapse in nominal GDP growth, which was just 8% in the June quarter. Nominal GDP figures are not adjusted for inflation, and therefore are not very useful in making inter-temporal comparisons. But they matter a lot for tax collections. Tax projections made in the budget are based on projected nominal GDP growth for the year. This year’s budget had a projected nominal GDP growth of 12%. An 8% growth rate can lead to a serious shortfall in taxes.

3. Private consumption has been the driving force behind India’s economic growth for a long time. There are signs that it is stalling. Private Final Consumption Expenditure (PFCE) growth was just 3% in the June quarter. Between March 2018 and June 2019, GDP growth has come down by 3.1 percentage points. PFCE growth has fallen at a much faster pace, by 5.6 percentage points.

II. How did we get here?

4. One of the biggest factors behind the current slowdown in consumption is the squeeze on the rural sector. A low inflation regime, driven mainly by falling food prices, had put the squeeze on farm incomes. This, in turn, has led to a squeeze on rural wages. This is bound to have adversely affected rural demand, which must have created headwinds for private consumption. While there has been some revival in food inflation recently, it continues to be very low in rural areas.

5. Even in urban centres, consumer sentiment had been worsening for a long time. The Reserve Bank of IndiaI’s Consumer Confidence Surveys (CCS) show a weakening of perception about the general economic situation as well as spending on non-essential items.

6. A slowdown in consumption demand, which has been accompanied by growing uncertainty about export prospects due to trade wars, has made investors jittery. This probably explains why repeated attempts to boost investment by interest rate reductions by the RBI have not worked. The central bank has been downgrading its growth forecasts with every rate cut.

III. What are the constraints in fighting the problem?

7. Given the fact that the monetary policy route of lowering interest rates has not helped in reviving the economy, demand for a fiscal stimulus is increasing. However, this will not be an easy thing to do. If the nominal growth rate is significantly short of the projected rate of 12%, the government might face a significant shortfall in taxes and meeting even existing commitments will be difficult. Even last year, the government had a shortfall of Rs 1 lakh crore in Goods and Services Tax (GST) collections.

8. While there is a broad agreement about the current slowdown in the Indian economy, we still do not have clarity about what exactly has happened to the economy in the last few years. Policies such as demonetisation and GST had a disruptive impact on the economy. But we do not know how much of this disruption was temporary in nature. For example, the 2017-18 Periodic Labour Force Survey (PLFS) showed unemployment to be at a four-decade high. Consumption data for this period has not been released yet. These statistics are critical in ascertaining how the Indian economy has changed in the recent past and what needs to be done to revive economic activity.

9. The global economy is confronting recession concerns. The worries of global growth slowing down have been compounded by a reversal of the yield curve in the US, with long-term bond yields falling below short-term yields. Although bond yields are a financial market phenomenon, long-term yields falling behind short-term values is seen as a precursor to a slowdown.

IV. What is at risk?

The Indian economy has not been on a sustained high-growth path after the 2008 economic crisis. At a time when the global economy seems to be headed towards bigger uncertainties and all major economies are facing deceleration, the big question is whether India can return to a high-growth path. This will be the biggest determinant of whether or not we can bridge our per capita income gap with countries such as China.