For the past financial quarter, various facts and figures have been making rounds that clearly imply that we are experiencing an economic slowdown. The term has also in the recent past, meant that the GDP has been recorded at its lowest rate – 5.8% in the first quarter. The union budget had promising claims to revamp the current scenario yet nothing concrete has been done with respect to major sectors like manufacturing and agriculture that contribute highly to the gross produce of the country.
It is extremely important to analyse whether this slowdown is temporary and we can bounce back or if it is the entire structure leading to a great decline and recession. Every economy goes through a cyclical slowdown which means there can be changes in the business cycle, a sudden emergence of demand and supply gap and varied monetary policies. However, sometimes the problems of the economy can go deeper, impeding the efficient and fair production of goods and services. In such a scenario, it will not be enough to introduce just fiscal reforms. Rather, these issues would require the government to undertake some structural policies.
A prominent illustration of this would be the reforms that were introduced to fix the crisis in 1991 under the leadership of PV Narasimha Rao which is popularly known as the LPG model of growth. The policy was fundamentally based on the New Economic Policy, that was designed by former Prime Minister Manmohan Singh. It stood for Liberalisation, Privatisation and Globalisation. Some steps like free trade policies, PSU disinvestment and encouraging foreign investment marked the genesis of a completely reshaped Indian economy that till date has managed to keep global repute.
So now the question is, does India need one such structural reform yet again? To answer this question, various parameters need to be scrutinised thoroughly to obtain a specific solution. The most important factors that drive an economy are investments, exports and savings. Each of these offers a foundation on which the growth factor stands. As per the Economic Survey of the Union Budget 2019, investment is the most crucial factor that facilitates demand, increases labour productivity, introduces new technology, and generates jobs, thereby catalysing a self-sustained virtuous cycle.
Now, the investment rate which is also called the GFCF (Gross Fixed Capital Formation) is defined as the acquisition of produced assets (including purchases of second-hand assets), including the production of such assets by producers for their own use, after subtracting disposals. This has shown a major decline from 34.3% in 2011 to 28.6% in 2018. In the same way, the gross domestic saving as a percentage of the GDP has dropped to a striking 29.3% in 2018 from 32.7% in 2011. Besides, the export percentage of the GDP has witnessed a fall from 24.5% to 19.6%. So, none of these important indicators of growth have performed adequately.
Apart from these, the Indian economy has been hit hard by the poor performance of the manufacturing sector. For instance, the auto industry is going through a major fall in sales and hence a loss of jobs. This has caused piling inventories and companies are forced to cut down production. The cutting down of production has furthered prevailing employment stress. This said to be the worst ever crisis in this industry in the past 20 years with almost 2.3 lakh jobs lost.
Also, the inflation rate in the economy has declined from 10.03% in FY13 to 3.41% in FY19. The low inflation rate would be a relief to consumers, but a prolonged period of falling prices is not good news for the economy. A constant fall in the inflation rate leads to over-production with highly reduced purchasing power and discourages new investments which in turn affects employment. This is an apt example of the major demand and supply gap that can significantly weaken the economy.
The next significant factor that indicates a poorly performing economy is the liquidity crisis prevailing in certain sectors. Liquidity basically can be defined as the ease of converting to cash, often considered the most liquid asset of all (cash is considered as the basic standard of liquidity as it can be converted to other assets quickly). Hence, decent economic growth is impossible without adequate liquidity.
Key Indian sectors are experiencing a period of acute consumption slowdown, followed by a period of extreme liquidity crunch after subsidiaries of Infrastructure Leasing and Financial Services Limited (IL & FS) struggled to pay back loans taken from banks in 2018. Here, a relation appears with the slowdown of the auto industry that India’s NBFCs (Non-Banking Financial Corporations) is one of the biggest factors that have contributed to the slowdown in the sector. A liquidity crisis negatively affected the companies that were plagued with lower sales.
For instance, according to the letter written by the SIAM to the Finance Ministry, 70% of two-wheeler sales and 60% of commercial vehicles sales are financed by the NBFCs. This, however, is expected to be a cyclical slowdown which should not be allowed to become more serious.
With all the points stated above, it is absolutely evident that the government needs to take some concrete corrective measures so that each of these issues is addressed properly. It is anticipated that the next two months will be crucial in managing the economy in a rich way. The main focus should be on boosting investment immediately. Further, as the festive season approaches, the government must monitor the demand patter strongly as it will be an opportunity. The factor of demand creation requires strong attention because production without adequate demand may further weaken the economy.
The overall situation is actually leading to a crisis which may not be able to combat the major economic recession the entire world is going to have in 2020. Strong land reforms along with major structural changes in the economy are the essential need of the hour. It is true that the situation isn’t as bad as 1991, but it is definitely not better than what it was in 2009.