COURSE: MACRO ECONOMICS

COURSE CODE: BMT6111

SEMESTER: Tri Semester’2019-20

PROJECT
SUBMITTED TO
ASSOCIATE PROFESSOR
VIT BUSINESS SCHOOL
 PRESENT INDIAN ECONOMY SLOWDOWN
Introduction:
Indian Economy is a fast developing market economy. Indian Economy is the world's fifth-
largest economy by nominal GDP and it is the third-largest in purchasing power parity (PPP).
India's economy was growing at the rate of 7.1% of the GDP surpassing China in FY19 but at the
starting of FY20 the growth of the Indian economy started to slow down and the growth rate
reduced to 4.5% at the end of second Quarter of FY20. This economic slowdown happened due
to the main reason like reduce in purchasing power where 60% of GDP is from the domestic
market. This slowdown affected many sectors like automobile, textile, steel, real estate, etc. The
sale of products reduced which resulted in a temporary shutdown of many plants in these sectors.

Indian Economy Overview:

Since independence in 1947 to 1991, with significant state intervention and control, successive
governments adopted protectionist economic policies, but the end of the Cold War and an
unprecedented balance of payments crisis in 1991 contributed to the introduction of a
comprehensive program of economic liberalization. Since the beginning of the 21st century, the
average annual GDP growth has been 6% to 7%, and from 2014 to 2018, India has been the
fastest-growing major economy in the world, surpassing China. Historically, India has been one
of the world's largest economies from the 1st to the 19th century for most of the two centuries.

The Indian economy's long-term growth outlook remains promising due to its young population
and corresponding low dependency ratio, healthy savings, and investment rates, as well as its
growing integration into the global economy. Because of shocks of "demonetization" in 2016
and the implementation of goods and services tax in 2017, the economy slowed down in 2017.
About 60% of India's GDP is driven by private domestic consumption and remains the sixth-
largest consumer market in the world. Indian GDP is also driven by government spending,
production, and exports, apart from private consumption. India was the 10th largest importer in
the world and the 19th largest exporter in 2018. Since 1 January 1995, India has been a member
of the World Trade Organisation. It ranks 63rd on the Facility for Business Index and 68th on the
Report for Global Competitiveness. With 520 million workers, the Indian labor force is the
second largest in the world after 2019. Since India has a large informal economy, only 2% of
Indians pay income taxes. The economy faced a mild recession during the 2008 global financial
crisis, India introduced stimulus measures (fiscal and monetary) to boost growth and generate
demand; economic growth resumed in subsequent years. According to the 2017 study of
PricewaterhouseCoopers (PwC), the purchasing power parity of India's GDP could surpass that
of the United States by 2050. According to the World Bank, India must focus on reforming the
public sector, infrastructure, agricultural and rural development, removing land and labor
regulations, financial inclusion, stimulating private investment and exports, education and public
health, to achieve sustainable economic development.

Economic Slowdown:

Despite the various measures taken by the Government, the downturn in the Indian economy
continued to intensify in July–September 2019, with GDP growth of 4.5% in the second quarter
of the financial year 2019–20 (Q2 FY 20) compared to 5% in the first quarter The growth rate
has now decreased by 3.6 percentage points over the sixth consecutive quarter In the latest GDP
sequence, the growth rate is 4.5% relative to the lowest in fourth quarter of FY13, which is 4.3%.
The underlying private demand is low, despite higher government spending, the scenario has
been slowly worsening. This is because demand has not been able to pick up, and private
investment has stagnated. GDP growth is 3.6% on a sequentially adjusted annualized average
basis. The private final consumption expenditure rose by 5 % in Q2 compared to 3.1 % in Q1
based on the spending patterns. But this growth is at odds with evidence coming from different
sectors for both rural and urban subdued consumption. The gross fixed capital investment
increased by 1% in Q2 relative to 4% in Q1. The government's final consumption expenditure,
however, increased by 15.6% in Q2 compared to 8.8% in Q1. Corporate debt, banks ' risk
aversion, and the downturn in the non-bank financial firms have come in the way of demand for
investment. One of the explanations for India's deceleration is tight credit constraints, part of
which is an issue on the supply side, other than global causes. This would mean a long period of
lower capacity usage, a pause in the investment process, and a reduction in long-term potential
growth in a prolonged period of stagnation in demand.

Source: Business Standard

Informal industries are also likely to have been severely affected during the worsening recession,
but official statistics do not capture this adequately. In the wake of the economy's downturn, the
labor markets still bore the brunt. The unemployment rate had reached a three-year high of 8.45
% in the month of October, according to the Center for Monitoring Indian Economy (CMIE).
The unemployment rates were 7.16 % and 8.19 % respectively in the intervening months of
September and August. According to the CMIE Consumer Pyramids, Household Survey
(CPHS), labor force participation rates decreased in November 2019 by 77 basis points to 42.37
%. This was the lowest level since the start of these assessments in the CMIE in January 2016. In
November over October, 15 of the 25 states reported by the CPHS saw labor-force participation
rates decline. Employment and loss of income have reduced demand for consumption, and one of
the main reasons for this was rural distress.

Causes For slowdown:

1.Disruption, Jolt of reforms:

Demonetization: The Indian economy is cash-driven, and its development has been greatly
affected by demonetization. Amid demonetization, the GDP growth rate of 8.01% in 2015-2016
dropped to 7.11% in 2016-2017 and kept reducing to 4.5% till Q2 of FY20. For cash-intensive
sectors such as manufacturing and construction, this was largely affected due to less cash
availability. It has also adversely affected banks ' primary role in issuing loans and put pressure
on them as current account holders demand large amounts of cash.

GST: The GST system was launched on 1 July 2017 in a function at Parliament's Central Hall
immediately after the demonetization. The GST system amplified the effects of demonetization,
every sector has been hit due to the change in the tax policies. Many small scale industries shut
down their operations and many employees have been unemployed due to the high tax rate and
to change the audit structure to pay tax. This resulted in the reduced expenditure of the people
which gradually led to a slowdown in the economy.

2.Tight Monetary and Fiscal Policies:

Monetary Policies: Despite the Demonetization and GST, the RBI didn’t reduce the repo rate
until February 2019. Since people have low income due to the effect of GST and demonetization,
the expenditure of the people reduced drastically. The Reserve Bank of India should have
reduced the repo rate at the beginning of the recession so that people may get a loan at the
reduced interest and the expenditure may have raised. The present repo rate is 5.15%.

Fiscal Policies: The combined fiscal deficits of the Central and state government is high. The
government is trying to reduce its expenditure and didn’t have money to spend on active
measures at the starting of the recession.

3.Global Headwinds:

US-China trade war: Due to the trade war between two powerful economies,the exports have
been greatly affected. For example, China will buy yarns and cloth from India and make
garments and export to the USA but due to high tariffs, they stopped export. This affected the
Indian Lomb industry.

Crude oil price: The crude oil price was $47 per barrel in 2016 and it started rising gradually
and the present price is $ 72 per barrel. America launched an attack on Iran and killed it’s
General Soleimani which increased the instability in the Middle East region resulting in the price
of crude oil. The rise in the price of crude oil will also raise the price of products.

4. Financial sectors are in Mess:

NPA ratio is worsened throughout the year and it is still high. As the NPA of the bank rises the
scarcity of money in the Indian Security market. This will hurt the overall demand in the Indian
economy and it will lead to a slower growth rate and also causes inflation.

5.Rural Empty Pocket:

Non-food Inflation is more than that of food inflation which results in shifting of income to
urban regions from a rural region. In India, the rural population is very high than the Urban
population. So, if rural people’s expenditure reduces due to the lack of income, it will result in a
reduction in demand in the Indian economy. The present growth rate of rural income reduced to
3.7% where it was 28% in 2014.

Effects of Slowdown:

FMCG: When some of the biscuit makers faced job losses due to falling demand, the entire
nation was shocked. It turns out, however, that the situation is not that bleak and the whole
episode was more about getting a cut in the sector's GST rate. Nevertheless, companies such as
Hindustan Unilever, Dabur India, and Britannia Industries, among others, experienced the June
quarter's volume decline. Such businesses are primarily affected by a decline in rural demand.

Automobile: During the GST Council meeting in Goa, the much-awaited reduction in GST did
not come for the automotive sector, leaving manufacturers to fend for themselves. Car
companies ' revenues have fallen for at least for the last 18 months. While a downturn in the
economy is the primary reason for falling car sales, sentiments have been further influenced by
other factors such as the country's shift to BS-VI standards and move toward electric vehicles.
More than 1lakh employees lost their job due to lack of the demand and shutdown of the
operations in this field alone.

Steel: In more cases, high prices of iron ore and weak demand forced many steelmakers to cut
production by as much as 50%. As this industry is the biggest customer, the steel sector also
feels the pinch when automakers go late. In July, steel prices dropped below INR 40,000 per ton
for the first time since December 2017, rendering it unviable for steel manufacturers.

Consumer durables: consumer durables stay far behind if FMCG is affected. Shortly before the
festive season, sales of televisions, washing machines, and other white goods were down.
Consumer durables producers are crying out for a drop-in GST level. As a reprieve, last week the
government abolished import duties on open cell LED panels representing 60-70 percent of
television prices.

Real Estate: The housing market was already under pressure as the failure to deliver
infrastructure became a huge threat and the government had to step in. Builders are now finding
it tough to tempt customers with RERA rules applicable in different states as punitive provisions
have become rigid. Consumers are unsure about future income with the recession kicking in and
are also reluctant to make purchasing decisions.

Steps taken by the government:

 Revoke the recent rise in high-income taxes. This can also restore faith in Indian markets
among FPIs.
 Reduce corporate taxes to 25 percent for all companies and remove exemptions as
announced in the Modi administration's first year.
 Take back the idea that the public shareholding of all listed companies must be 35%.
 Reduce the statutory liquidity ratio (SLR) and direct lending to government banks, rather
than buying more government protection (G-Sec) debt. Set loan goals for banks in the
public sector.
 Do a fast quality review of non-bank financial firms (NBFCs) and assist those well-
managed and critical to recovery.
 Provide opportunities to stimulate demand in the housing and automotive sectors. Even
temporary relief that is time-bound will help. Remove all restrictions on e-commerce.
 Aim 10-12 Tax credit, duty-free access to imports and tax incentives are primary export-
oriented labor-intensive sectors.
 Selling 50-60 public sector undertakings (PSUs) vigorously and steering funds to the
National Investment and Infrastructure Fund (NIIF). Make sure the sale of Air India is
not stalled again.
 Drop all conditions for micro, small and medium-sized enterprises (MSMEs) for labor
laws and provident fund (EPF) workers.
 Monetarize existing infrastructure assets in order to speed up funding for new projects.
  Reducing rail freight prices and reducing tariff cross-subsidization.
 Abolish the Corporate Social Responsibility (CSR) Act and not just delete the
infringement liability provision, as GoI supposedly decided earlier this week. No other
nation has a rule like this. It simply lowers the competitiveness of India, with no clarity as
to its impact. But more systemic steps will also be required for the competitiveness of
India in the medium term.

Conclusion:

Indian Prime Minister promised that in 2024 the India economy will reach the $5 trillion GDP
but according to the present slowdown, the promise is like a dream that cannot be realized. If we
want to realize the $ 5 Trillion GDP the growth rate must be 11% where the present growth rate
is 4.5% lowest in 7 years. The Government should try to increase the income of the people so
that the expenditure will rise. This results in an increase in demand and stabilizes the economy.
Strong Monetary and Fiscal policies should be implemented to encourage investors and
manufacturers to do business. The Government should also focus on rural people and bring plans
to develop their skills and improve their income.