Saturday, September 9, 2017

Why is Indias GDP growth slowing down?

Ever since the GDP figures for the last fiscal quarter was released and the growth fell to a 3 year low of 5.7% people have been quick to criticize Demonetisation and the rollout of GST as the major contributing factor for the same. Is the blame rightly placed?

Hopefully by the end of this article you can get an answer to this question.

Before we begin: This is not a politically motivated article. The views in this article are entirely those of the author and are not sponsored or motivated by any individual or group. If you wish to disagree with the views, kindly refrain from posting derogatory or abusive or vulgar comments. They WILL NOT be published.

Indias GDP Growth over the past 3 years

Look at the graph below, the GDP Growth peaked at 9.2% in early 2016 and in just 1.5 years we are now at 5.7%.

Every economy goes through cyclical phases in GDP growth. It is just not possible for any economy to continuously grow at 8 or 9% quarter on quarter but this steady downtrend in GDP Growth is an alarming trend and definitely not healthy for our Economy

Reasons for the Slowing GDP

Inflation has slowed down, fiscal deficit has been in decent control, Foreign Investments are at record highs, stock indices are booming, crude prices are down and interest rates are going down. In spite of all this, our GDP growth has slowed down which is quite frankly unbelievable. There are many factors that this slowing GDP could be attributed to. They include:

1.     Steady flow of Government Surprises
2.     Slowing Consumer Demand
3.     Job Crisis
4.     Agricultural Crisis
5.     NPA Burden on the Banking System

Lets review them one by one.

1. Steady flow of Government Surprises

Like it or not, our Government is single handedly responsible for almost everything that happens in our economy and since mid 2016, there have been quite a number of significant government decisions that were nothing short of unbelievable…

First we start with Demonetization in Q4 2016 – a decision that nobody would’ve even dreamed in their worst nightmares. A decision that left a nation with over a billion people holding thousands of rupees in invalid currency. Government kept chaging the daily withdrawal limits, banks did not supply enough new currency to citizens for spending, VIPs were able to get all the new notes while middle & low income groups were left stranded with little to no cash available and things did not improve for months. In a country like India where cash is still the most preferred means of payment, this cash crunch landed a head-shot on the economy.

Then comes the rushed adoption of Aadhar which was made mandatory for almost everything except for sitting idly at home. Government offices were unprepared to handle the volume of people showing up for getting their ID’s done, systems were not robust enough so people had to make multiple trips which impacted businesses for the 3-4 month period when Aadhar was the talk of the town. Though this merely a body blow, it wasn’t something our economy needed after being on the receiving end of the head-shot which was Demonetisation.

Then came GST which again was rushed into implementation. Yes, chartered accountants who were able to quickly master the proposed GST regulations were able to help businesses but in a country of India’s size, a handful of CAs cannot help everyone. Small and medium sized enterprises that add a good % of India’s GDP Growth struggled very much especially those that had operations in more than one state. With stiff penalties for businesses that fail to adopt GST, businesses had no choice but to adopt in spite of all the problems which definitely was yet another head shot for our already ailing economy.

Even though, at the time when these decisions were announced, the long-term benefits did look like they would outweigh the short-term pain, the reality hasn't been nearly as straightforward. 

 2. Slowing Consumer Demand

Because of the steady flow of government surprises that have impacted peoples livelihoods, the euphoria and optimism that existed through the major part of 2016 has been replaced with Caution & Skepticism. People have reigned in their spending and have started accumulating assets/investments that would potentially help them out just in case the economy goes south.

This is very evident from the increased demand for gold and insurance products along with a steady rise in investments being pumped into the stock market instead of being spent on consumables.

When people spend less, businesses earn less which means GDP doesn’t grow as well as it could. Simple isn’t it?

3. Job Crisis

in a country with over a billion citizens, getting a job that too one that pays well is always going to be hard. Competition is immense and cut-throat. As a consequence of the economic slow-down and reduced consumer spending, businesses haven’t been able to grow fast. The Manufacturing sector which grew by 5.3% in Jan-Mar 2017, grew only by 1.2% in Apr-June and is struggling to gain traction. When industries especially manufacturing don’t grow, job growth isn’t expected to grow. Unemployment is still a major problem in our country and I feel the governments in the last 10 years haven’t done anything significant to change the situation for our youth that enter into the job market year after year…

4. Agricultural Crisis

Agriculture is considered the backbone of our nation but ironically has been under tremendous pressure in the past few years. In most parts of the country, rainfall has been quite healthy but agricultural growth isn’t. Farmers committing suicide in different parts of the country is something you can find almost every day in newspapers. Livestock directly contributes about 4% to our country’s GDP. Do I even need to explain that this 4% of the GDP is under significant strain in the past 2 years? Uttarpradesh India’s largest meat processing state has faced largescale shutdowns of slaughterhouses since early 2017 and the situation isn’t that bright in other parts of the country as well.

Agricultural growth was only 2.3% in the Apr-June quarter which you would agree is quite low.

Banks in India have been reeling under a lot of pressure owing to increasing Non Performing Asses. I had written an article on the NPA problem in Indian Banks in Jan 2017 and unfortunately the situation hasn’t improved much in the last 8 months. Banks still have super-high levels of NPA exposure and haven’t been able to infuse as much cash as they could’ve (if they did not have so much NPA) and this is also dragging our economic growth

What to expect in the coming months?

In spite of all this, our economy is still not effectively in a slump. The growth has slowed down but thanks to increased government spending in infrastructure space and banks getting a significant cash infusion thanks to demonetization  things haven’t become dire just yet. Almost all industry experts have revised our economic growth forecast to around 5-6% for the next year instead of the 7-10% predicted by our government.

Government needs to focus on agriculture, jobs creation and reviving industrial growth. Though the government is emphasizing on Make in India, decisions like Demonetization and GST are actually counterproductive to this narrative and isn’t helping India Inc grow.

For now, am cautiously optimistic but only time will tell if the government can walk the walk after all the talking that has happened. 

Lets hope for the best!!!

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