Economic Slowdown Intensified- Know Why! - Seeker's Thoughts

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Economic Slowdown Intensified- Know Why!


According to the Moody, India’s GDP growth will remain weaker than in the recent past. The agency said India’s GDP growth forecast for 2019-20 to 5.8% from the earlier estimate of 6.2%.

It attributed the deceleration to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation.

Announcing revision in its growth forecast for 16 Asian economies, it said weaker trade and investment weigh on GDP growth, despite stable private and public consumption in the region.

While not heavily exposed to external pressure, India’s economy remains sluggish on account of a combination of factors, including weak hiring, financial distress among rural households and tighter financing conditions due to stress among non-bank financial institutions.

Moody’s said that domestic factors have had a greater influence on growth in India. The moderation in business sentiment and slow of credit to corporates have contributed to weaker investment in the country.

RBI has been most active in cutting rates in support rates in support of growth, but lingering financial sector issues may blunt the effectiveness of the monetary stimulus.

It explained, the Asian economies, Honk Kong and Singapore have shown particularly weak expansions this year, with very large deteriorations in real GDP growth when compared to the first half of 2018.

Externally-oriented economies saw a sharper slowing during the first six months of 2019, while domestic factors have had a greater influence on growth in Japan, India and the Philippines.

The weaker worldwide economy has stunted Asian exports and the uncertain operating environment had weighed on investment. In particular, foster capital formation has mirrored the weakening in exports, especially trade-reliant economies such as Korea and Hong Kong.
India's current situation

The situation is so bad that many Indian industrial have complained loudly about the state of the economy, the distrust of the government towards businesses and harassment by tax authorities. India’s economy has been tipped to enter recession in the first quarter of 2019 with gross domestic product growth falling to a five year low of 5.8%. 

Slowdown intensified and became visible when auto sales fell 31% in July, followed by a heavy slump in sales from the stock market to auto market to textile to inner garment industries, sales from biscuit to hair oil products.

Half of the India companies are earning less than Rs 1 crore, according to the finance ministry data.

The data indicates that the profit earning companies are also sitting on the cash and not investing in any tangible assets. 

The level of investment has gone down in the financial year 2016 and 2017.

Failure of reinvesting earnings if the low-risk appetite for-profit companies in new means of production have led to shirking in the economy. 

 In the quarter ending in June 2019, investment in new projects has gone down to a 15 year low, the Centre for Monitoring Indian Economy (CMIE) shows. 

Companies announced new plans with Rs 43,400 crore in June 2019 almost 87% lower than the last year same period.
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One of India’s most celebrated entrepreneurs, the founder of the largest coffee store chain, café coffee day, recently killed himself, ostensibly due to unimaginable debt, slowing growth and alleged harassment by tax authorities.
So, it is indeed true that India is facing a sharp economic downturn and severe loss of business confidence.

In other words, there is almost no investment in new projects by the private sector.

 The situation is so bad that many Indian industrial have complained loudly about the state of the economy, the distrust of the government towards businesses and harassment by tax authorities.

 India’s economic slowdown is not so sudden!
Behind the facing headlines in the press over the past five years about the robustness of India’s growth was the vulnerable economy, straddled with massive bad loans in the financial sector, disguised further by a macroeconomic bonanza from low global oil prices.

India’s largest import is oil and fortuitous decline in oil prices between 2014 and 2016 added a full percentage point headline GDP growth, masking the real problems.

Confusing luck with skill, the government was in denial and careless about fixing the choked financial system.

Demonetization and GST impact

The situation got worse in 2016 when all high –value banknotes withdrawal from circulation overnight. This effectively removed 85% of all currency notes from the economy.
This move destroyed supply chains and impacted agriculture, construction and manufacturing that together account for three-quarters of all employment in the country.
Before the economy could recover from the currency ban shock, the government enacted a transition to a new indirect taxation system of the Goods and Services Tax (GST) in 2017. 

The GST rollout wasn’t smooth and many small businesses initially struggle to understand it.
Such massive external shocks to the economy, couples with a reversal in low oil prices, dealt the final blow to the economy. Millions of Indians started to lose their jobs and rural wages remained stagnant, this, in turn, impacted consumption, slowing down the economy sharply.

What finance ministry has been doing... 
Finance minister admits that India is suffering the worst economic slowdown in a decade. She also said the government is holding consultations with ailing sectors and refused to admit that the country is going through the economic crisis.
The coordinates of a slowing economy have become so prominent that even laymen, with knowledge of economic jargone, have started identifying the crisis as job losses continue to mount across most sectors. 

How can the government increase economic growth?

There are two main aspects of economic growth:
1 – Aggregate demand (AD) (consumer spending, investment levels, government spending, export imports)
2 - Aggregate supply (AS) productive capacity, the efficiency of the economy, labor productivity)

Aggregated demand can increase for various reasons.

          Lower interest rates – reduce the cost of borrowing and increase consumer spending and investment.       Increased real wages – if nominal wages grow above inflation.

-        Higher global growth – leading to increased export spending.

-        Devaluation, making exports cheaper and imports more expensive, increasing domestic demand.

-        Rising wealth, e.g. rising house prices cause consumers to spend more (they can remortgage the house.

This is growth in aggregate supply (productive capacity). This can occur due to:

-        Development of new technology, e.g. steam power and telegrams helped productivity in the nineteenth century. Internet, AI, and computers in the twenty-first century.

-        Introduction of new management techniques, e.g. Better industrial relations helps workers become more productive.

-        Improved skills and qualification.

-        More flexible working practices – working from home, self-employment.

-        Increased net migration – especially encouraging workers with the skills that are       in short supply (e.g. builders, fruit pickers)

-        Raise the retirement age.

-        Public sector investment – e.g. improved infrastructure, increased spending on education.

Also, Read
The Black Money
Demonetisation And its Impacts
Unemployment in the Fastest Growing Economy

A government can influence the rate of economic growth

     -   Expansionary fiscal policy – cutting taxes to increase disposable income and encourage spending. However, lower taxes will increase the budget deficit and will lead to higher borrowing. The expansionary fiscal policy is most appropriate in a recession when there is a fall in consumer spending.

   -  Expansionary monetary policy (now usually set by independent Central Bank) – cutting interest rates can boost domestic demand.

Stability. A key function of the government is to provide economic and political stability which enables the usual economic activity to take place. Uncertainty and political tension can discourage investment and economic growth

-       Supply-side policies Investment in infrastructure – increases productive capacity and reduces congestion.

-        Privatization and deregulation – increase efficiency and productivity.

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     Factors beyond the government’s influence

- The rate of technological innovation tends to come from the private sector and it is hard for the government to influence.

- Industrial relations and workers motivation are driven by the private sector. The government’s influence on worker morale and motivation is limited at best.

- Entrepreneurs who set up a business are largely self-motivated. Though government regulations and tax rates can influence the willingness of the entrepreneur’s willingness to take risks.

- Level of savings can influence growth (e.g. see Harrod-Domar model) Higher savings enable higher investment, but it can be hard for the government to influence savings.

- Willingness to work. In the post-war period, the defeated countries Germany and Japan saw rapid rates of economic growth – reflecting a determination to rebuild after the war. UK economy had less dynamism – this could reflect different attitudes to work and willingness to introduced new ideas.

- Global growth exerts a strong influence on any economy. If the world enters a global recession, it is very hard for an individual economy to avoid costs. For example, the credit crunch of 2009 negatively affected economic growth in OECD economies.

More currency or trade tariffs are not the solutions either. The central bank has lowered interest rates and there is some push to lowering the cost of capital for industry. 

But again, the Indian industry will invest more only when demand for goods and services increases. And demand will increase only when wages increase, or there is money in the hands of people. 

So, the only immediate solution for India seems to be to boost consumption through a stimulus given directly to people, in the classical Keynesian mold.

Keynesian theory – which says the government should increase the demand to boost growth. As consumer demand is a primary driving force in an economy, clearly the theory supports expansionary fiscal policy.

Of course, such a stimulus should be combined with reforms to boost business morale and confidence.
In sum, India's economic picture is not pretty.
It is important for India's political leadership to see this not-so-pretty picture and not hide behind rose-tinted glasses. Prime Minister Modi has a unique electoral mandate to embark on bold moves to truly transform the economy and pull India out of the woods.

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