The Indian economy has gone through a lot of phases in the last 5 years. There has been a turbulent change in economic policies, all of this has impacted the citizens of the country in various manners. The economy was at a high point with a growth rate of 8.17 % in the year 2016 which is currently at 4.5%. This is a significant drop which contradicts the government's aim to make India a USD 5 Trillion Economy
The recession in the economy started kicking in the year 2018-19 after the series of measures implemented by the government such as Demonetization, Goods and Service tax, ILFS crisis and NBFC credit crunch. The thought process behind these measures were appropriate and logical but where the government lacked was their implementation and examination of the consumer and industrial reaction. First, There are a few causes to which we can blame this recession for. GDP is a sum of four values: government expenditure, consumption, investment and net exports. .Since all components of the non-government part of the GDP are performing poorly, the only driver of overall GDP that remains is government expenditure. In the last quarter alone, the government expenditure grew by a whopping 15.64 per cent. In 2017-18 and 2018-19, the government expenditure has grown by about 15 per cent and 9.25 per cent respectively. There are limits to the extent to which government stimulus can drive the Indian economy. First, government expenditure accounts for just above 10 percent of India’s GDP. Second, in an economy that has stagnated, tax collections start to taper off. Third, the government cannot make up for the private investment which accounts for 60% just by putting a burden on their expenditure.
Second, The evidence of the weak domestic output growth,naturally gets reflected in poor labour market outcomes. The labour force participation rate – that is, those working or looking for work as a proportion of the population in the age group 15-59 – has declined from 39.5% to 36.9%. It means that discouraged workers have dropped out of the labour market due to lack of employment opportunities. If domestic output growth has decelerated, millions have lost jobs and rural wages have practically stagnated, it is reasonable to expect a decline in personal consumption.
Third, It is not these factors alone, and the most important factor is that there is also a global economic slowdown that is happening and given the fact that India is a net commodity exporter, there has been a slump in the volumes of exports. Apart from that, the global slowdown has also been accompanied by a retreat of globalization which has resulted in FDI or Foreign Direct Investment being only in the areas of speculative finance.There are many more causes for the economic slowdown that we are facing right now
Let’s get to the real question, Do we think that India can survive this recession ?
There have been enough speculations,discussions and debates over this and mostly all the financial institutions and economists feel that this is a temporary phase. A majority of analysts also believe that India’s GDP growth slowdown has nearly bottomed out. “Even though growth is likely to remain subdued in Q3 2019-20, data flowing in from several lead indicators have been encouraging,” said FICCI Economic Outlook Survey. Economists have cited reasons such as the higher amount of projects sanctioned by financial institutions, greater deployment of funds in fixed assets by corporations, an increase in government capex spending, and higher payouts to support rural income schemes.A combination of fiscal stimulus and financial sector reforms, boosting investment and consumption, is expected to “support a recovery” in India’s economic growth to 6.6 per cent in 2020-21, a United Nations (UN) report said.
Even as the Indian economy has started to show signs of revival, it may take up to another one-and-a-half year to heal completely. This is due to the deep scar made by the current ongoing pandemic. The IMF predicts a global recession worse than the 2008-09 financial crisis which in turn will lead to a 1-2% fall in global GDP. This will obviously lead to a fall in the growth rate of all countries, wherein the worst affected will be the developing countries. India has made several attempts in order to get out of the slowdown such as slashing of corporate taxes, changing the income tax slabs, introducing more financial support for Medium and Small enterprises, extension of the tax filing dates, change in repo rate etc.
This has put India in a very strange position where we were not ready to face the first crisis that we are now greeted with a second and a very huge one. Any country can and will of course survive the depression but the question still stands when and how.
Hi Arnav, Very well summarised note . You have covered all the fiscal aspects of the economy backed by very good data points. Very good and in-depth research. I found the article very useful and informative. I may use some of the data points from this note like govt expenditure only contributes 10% of economy. You should keep writing. Next note you may cover monetary aspects also
Very nicely worded and written Arnav.... Way to go.... You have summed it up in a very crisp manner...
You can also add the impact of COVID19 in your Article.