Insights into Editorial: Unending Slowdown

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Insights into Editorial: Unending Slowdown


indian-slowdown

Context:

The Indian economy lost steam in the April-June quarter, slowing to a 13-quarter low of 5.7% as companies stalled production in June to prepare for the switch-over to the Goods & Services Tax regime. According to economists, prolonged effects of demonetisation also contributed to the slowdown.
Data released by the Central Statistics Office (CSO) showed the economy grew 5.7% in April-June, the first quarter of the current fiscal year, slower than the previous quarter’s 6.1% and much lower than the 7.9% growth registered in the first quarter of 2016-17.

Finance Minister said recently, the 5.7 percent GDP growth rate in first quarter of this fiscal is a matter of concern and it throws up challenge to the economy.

Services sector post higher growth

Economic activities that saw growth of over 7 per cent in the first quarter are trade, hotels, transport and communication, among others. Trade, hotels, and transportation, impacted by demonetisation in the March quarter (6.5%), rebounded to grow 11.1%, mostly due to discount sales ahead of GST implementation. Growth in government spending held up close to double digits at 9.5%, continuing to support overall economic growth.

Slowdown steepest in manufacturing, mining

Uncertainty related to the GST rollout on 1 July, which came about eight months after the government cancelled 86% of the currency, saw manufacturers cutting production and dealers offering discounts on items such as cars. As a result, manufacturing growth slowed to 1.2% in the June quarter from 5.3% in the preceding quarter while mining activity contracted by 0.7%.

However, construction activity revived marginally from the negative print (-3.7%) in the March quarter to 2% in the June quarter, signs that the impact of demonetisation is receding. The agricultural sector grew 2.3 percent and the civil aviation sector saw passenger traffic soaring by 15.6%,

Why is there a decline in Growth Rate?

The slower growth is due to the decline in inventories ahead of the rollout of GST combined with the Demonetisation exercise. The rate has come down predominantly due to pre- GST effect as manufacturers were focusing more on clearing the existing stock.

Chief statistician of India said rising cost of intermediate goods and inventory deaccumulation in anticipation of GST implementation led to manufacturing growth falling sharply. Though he expects a revival in the second and third quarters as manufacturers normalise their stock positions subject to how well they have integrated with GST.

Why current trend in GDP growth is a matter of concern

The slower pace of GDP growth also means India lost the tag of the world’s fastest-growing large economy for the second straight quarter to China, which grew 6.9%.

The Reserve Bank of India said that its industrial outlook survey had revealed a waning of optimism in Q2 on capacity utilisation, profit margins and employment.

With capacity utilisation expected to weaken this quarter, according to the RBI, and with surveys suggesting that consumer sentiment has deteriorated steadily in August, the auguries for a demand rebound are far from promising.

The pick-up in government expenditure was reflected by the latest Controller General of Accounts data which showed that the government exhausted 92.4% of fiscal deficit target within the first four months (April-July) of the fiscal year 2017-18.

In addition to it, Finance Minister has said, the 5.7 percent GDP growth rate in first quarter of this fiscal is a matter of concern and it throws up challenge to the economy. He said, in coming quarters there is a need to work more on policy and investment to improve the figures.

Challenge before the government now

While expressing concern about the slower-than-expected expansion, the Finance Minister has acknowledged that the challenge before the government now is to work out both policy and investment measures to boost momentum.

  • The risks of fiscal loosening are manifold, especially at a juncture when several State governments have either announced or are contemplating large-scale farm loan waivers, which would push up interest rates and crowd out fresh lending.
  • Still, there is a thin sliver of a silver lining in the GDP data. The services sector continues to remain buoyant whereas manufacturing and mining sector showed a steepest decline.

The need of the hour

  • One option would be to suspend the fiscal road map for a limited period in order to pump prime the economy through increased capital spending by the government.
  • Government Policies should focus on country’s development and people should give ideas for better governance.
  • Niti Aayog Vice Chairman said transformational ideas are the need of the hour to boost economy.
  • There is a need to modernise agricultural sector to increase productivity and income of farmers.

The Finance Minister has his task cut out: to find ways to restore momentum before the tailwinds of low inflation and affordable energy prices start reversing direction.

Conclusion

The reforms undertaken by the current administration so far are will generate a positive impact on growth. Also, by the end of year, transitory and negative impact of GST, as well as demonetisation, will gradually diminish. The central bank (Reserve Bank of India) has also taken steps to clean (up) bad loans. This will improve the health of the banking sector, especially public banks, and help aid private investment. Now inventories have returned to normal levels, which will help revive economic growth in coming months.