India’s Economic Growth Is Falling Down, My Fair Lady

India’s GDP is estimated to fall further. Several institutions said it. Rating agencies said it. Brokerage firms said it. Now, the World Bank has also said it.

The interesting thing to note here is that it’s not falling because of trade war and Brexit. But because of the country itself.

What is happening?

In its South Asia Economic Focus Fall 2019 report, World Bank has said, “India’s cyclical slowdown is severe”. The Washington-based bank has slashed our country’s GDP growth forecast from 7.5% in April to 6% for current fiscal. This is the fifth straight quarter India’s GDP growth has been slowed, falling from 8.1% in the first quarter of 2018 to 5% in the second quarter of 2019. Also, growth in the second quarter was the lowest in more than six years.

This doesn’t sound like good news for India. But things get really interesting if you read the report a little bit more.

Why is the country’s growth slowing down?

Because of a decline in domestic demand.

For many years, domestic demand was the reason behind India’s high growth rates. But now it has changed.

But not this year. Private consumption and investment both grew slower than overall GDP in the second quarter of this year.

Also import growth plunged to 4.2% in the second quarter from 11% a year ago.

But why?

• Strong decline of car sales
• New emission regulations
• Doubts around GST rate cuts
• The crunch in the non-banking financial companies(NBFCs) sector
• Government consumption has also become the fastest growing expenditure component.
• India’s weak financial sector is affecting the economic growth as well. India’s banking system still has a considerable level of non-performing assets.
• The liquidity crunch caused by the NBFCs crisis is also dragging down the growth.

What is the government doing about it?

The report also says that the monetary policy easing by the RBI and the government’s recent stimulus package will help the economy.

As part of the package, the Centre will be merging more public sector banks, giving around $32 billion for the government to spend on recapitalising banks.

To help the NBFCs sector, the Centre is looking to give partial credit guarantees to PSBs and included measures in the budget as well.

So, is the country safe from a slowdown?

No, it’s kinda not.

In a great article written by Reuters, Rini Sen, India economist at ANZ said that the actual impact of the corporate tax cuts on growth is uncertain. She added that the current problem is weak demand and a measure to boost demand would have been more productive.

That’s true.

Even though the World Bank report says that India’s growth rate will rebound later in the year, we can’t say that for certain as well. Before the general elections, one report stated that India’s growth will bounce back after the elections. But the bouncing hasn’t happened yet.

So, at present, all we can do is wait and watch what the government will do to boost the domestic demand. Because at this point, we don’t want any cosmetic changes but real solutions.