The slowdown in the Indian economy has been the talk of the town recently. Since 2014 the economy has been going at a steady clip of around 6 – 7 percent. For the first time since 2014 the numbers aren’t adding up. The August end figures have been showing rather weak GDP figures. It seems the growth rate has slipped to 5%, a drop of around 1.5 - 2%.
There are a myriad of reasons as to why the economy has faltered. Opinions are divided as to which reasons have been the biggest culprits in pulling down the numbers. While there is no consensus on this, (economists rarely if ever agree on anything to do with the economy) a few reasons are cited and broadly agreed upon.
The demonetization is showing a belated effect. Liquidity was sucked away, especially from the informal market. The rural sector as well as the grey market for goods suddenly faced a shortage of hard currency. Wages got affected, and that had a cascading effect on demand for products. Then came the disruption of GST. This had an effect on the businesses of small and medium enterprises. Large industries also were affected but the effect on smaller industries with their smaller trade cycles and less reserves, was more. State revenue was disrupted as the system took time to stabilize. GST though a necessary reform, proved to be a disruptor which affected the cash flow in the economy.
Technology is a disruptor. Digital payments coupled with smart phone technology has served to affect the banking infrastructure. ATM machines are being used less since the government started promoting digital payments. Companies which look after the ATM chains have been reporting a reduced use of their vending machines as many now prefer e-wallets.
The bell weather of the economy, the auto industry, has reported a sharp fall in sales. While part of this can be attributed to cyclical demand, experts say, this is also due to ride sharing which is now prevalent among all classes of population and all age groups. People are now less likely to buy a new car as frequent job changes entails movement from one city to another. Also the younger generation is veering away from buying anything. They seem to prefer hiring rather than ownership. So cars and homes are more likely to be hired than bought by this age group. Hiring assets makes migration for job less cumbersome. A small shift in the preferences of this group has had a significant effect on the economy. While this may be partly responsible for the reduced demand in cars and real estate, reliable data is lacking. Moreover the reduction will be more gradual, not the sudden dip that we see in the current quarter.
Successive governments have gone in for incremental economic reforms rather than the big bang stuff. A case in point is the sale of Air India. This has been a work in progress for decades now. For any government, this is like trying to hold a tiger by its tail. Politically it is least palatable. Governments do not like to disrupt political equations. These actions reflect on their electoral performance. There are hundreds of loss making PSUs (Public Sector Undertakings) in India along with Air India which need to be sold off or privatized. But political will is lacking. These PSUs have been a drag on government revenue and the economy as a whole.
What ails the Indian economy? There are a lot of factors. The ones above are just a few of them. External factors like the slowing of the world economy, the self-centered (read protectionist) policies of countries, (globalization is in reverse), the US China trade war, the WTO disputes, all seem to be contributing to the slow down. Inside the country problems like bank management, reduction of bank NPAs, the agricultural loan distress, job creation, all need to be addressed and quickly. The government has a lot on its plate. Some very unpopular decisions will have to be taken. The 5$ trillion carrot is now seen by everyone. For once the government will have to ignore populism and put its house in order. With such a massive mandate, it just cannot pass the buck.
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