Understanding the Recent Slow Down in Indian Economy 2019: An Approach

For the last few decades, India’s Economy is growing at an impressing robust growth rate since the liberalization in 1991. Its growth has been almost smooth since then, except the brief slowdown effect in 2008 because of the US Housing Crisis or the fall of Lehman Brothers. But again, it is facing another economic shock this year in 2019. Though Narendra Modi came into power with a promise to revive India’s economy with a double digit growth rate; however now, for many reasons, the economy is under immense pressure to blossom to its full potential.

The NDA government has brought many long expected economic reforms in Taxation, 100% FDIs in several sectors, Ease Of Doing Business, new StartUp India Policy etc. Despite all these good efforts, the economy is yet unable to uplift to a more prosperous growth rate, but instead it goes down into a more fearful depth of graveyard with a low growth record of the last 10 years which is merely 5%. If we further analyse this recent economic recession in India, we will find out as a result some of these factors as responsible for the slowdown:

1. Too many Structural Reforms at the same time:

As Modi promised to bring massive economic reforms back in his 2014 political campaign, his NDA govt till now already tabled several bills before the lawmakers and passed them as well with their unstoppable majority power in both the houses now. Some notable structural reforms are GST, RERA(Real Estate Regulatory Authority), IBC(Insolvency and Bankruptcy Code), Mergers of Public Sector Banks, Demonetisation, etc which definitely impacted on the growth rate.

2. NBFC Crisis:

The insolvency of the country’s largest NBFC enterprise IL&FS, it surely pushes a setback on the confidence of country’s several banks on credit credibility in letting out new loans. Thus, it led to a scenario of lacking of liquidity in the market as well as business.

3. Billionaire Credit Defaulters:

India has recently witnessed many cases of credit and tax defaulters who ultimately fled away the country. Billionaire defaulters like Vijay Mallya and Nirav Modi are worth to be mentioned here. It certainly had a negative impact on mindset of creditors, investors and on the diehard optimists too to a certain bit. These tax defaulters affected on the Balance Sheet of country’s large banks. As a result, the banks closed their hands and it led to a Credit Contraction in the economy.

4. Slowdown in Automobile Sector:

The Automobile sector is already facing a price of slowdown in demand among the consumers; they have been again asked and challenged by the Finance Ministry to adopt new technology to transfer to renewable energy consumption from fossil fuels. Several tax-benefits have been introduced in the budget to attract new players in electric vehicles from abroad as well. It has become a new challenge for Indian automobile manufacturing companies as they had already invested so much in the fossil fuel driven vehicles. They simply can’t afford to close it down and investment another lumpsum into a new technology. But, however, the transition is inevitable as the whole world is bound to accept the challenge of Climate Change. Moreover, the government is standardizing from BS-IV to BS-VI by 2020, where Bharat Stage-VI is the new Environmental Standard that has been setup for the Automobile Sector from 2020. The industry is already worried about their large unsold inventories that were produced for BS-IV.

5. Adaptation of GST:

Although GST, Goods and Service Tax, was a much needed reform for the economy, but it’s fruits are yet to be cherished, as the economy is just coming out from the grip of several uncertainties that have been especially faced by numerous SMEs(Small-to-Medium Enterprises). Businesses at all level bore the cost in adopting this new tax regime.

6. Demonetisation:

Without a dispute, demonetization was legitimate as an action against the Black Money in India, but it also hugely impacted on the liquidity in the economy. SMEs faced difficulties in their daily transactions and remuneration to employees.

Other worth mentioning factors are as follows -

i. FII pulled out money in Billions from the stock market.

ii. Slowdown in growth of Manufacturing Sector and Agriculture as well.

iii. Merger of Public Sector Banks.

Many experts and industrialists, such as Mohandas Pai, Chairman of Manipal Global Education, are of the opinion that the central government is bringing so many Structural Reforms at the same time, and the country is yet to come out from the shadow of Demonetisation and GST Reform. There is also a negative sentiment in the market because of the NBFC crisis, Credit contraction due to big Credit Defaulters, external factors like volatility of Oil Prices and Currency exchange rate. The economy is, right now, not ready to bear any further major Structural Reform, though Land and Labour two major reforms as suggested by economists are yet on the line to be brought up.

At this crucial time, the government needs to take a measure which does have an immediate effect to change completely the direction and discourse in the market and economy as a whole. Otherwise, it won’t be that easy to comeout from the death graveyard soon. To achieve the dream of a 5 Trillion Dollar Economy by 2025, India will have to wait for another more years. And we can’t afford that! Rightly, our Finance Ministry has taken a bold and pragmatic step by cutting the Corporate Tax rate from 30% to 25% down. As expected, the market also responded quite positively as evidenced in the enthusiastic rise in Sensex and Nifty after the tax-cut news. This is also the once-in-a-life time for the government to sell out many of its stake in the debt ridden public sector companies to the private risk takers.

To conclude this, as Kiran Mazumdar-Shaw, Chairperson of Biocon, has suggested, a multi-pronged approach strategy is required to be taken by the government to hit at several targets simultaneously instead of a sequential one which already caused severe damages on the economy of India. Also, the industries and its players are to be allowed and expected to play their parts freely and fully. Perhaps, a less “Tax Terrorism” and faith of the government on wealth creators will help in gaining the confidence and obviously what is called “the animal spirit” to boost the economy towards a robust double digit growth!