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Deepening Economic Slowdown

What is the current scenario of the Indian economy?

1. Indian economic slowdown has deepened further.

2. GDP growth in the second quarter of the financial year 2019-20 was 4.5% as compared to 5% in the first quarter.

3. The private demand is weak despite higher government spending.

4. Consumption is not picking up, and private investment remains stagnant.

Which statistics support this slowdown?

1. The GDP growth is at 3.6% on a sequentially adjusted annualized rate basis.

2. According to expenditure trends, the private final consumption expenditure grew by 5% in Q2 as compared to 3.1% in Q1.

3. The gross fixed capital formation grew by 1% in Q2 as against 4% in Q1.

4. The government’s final consumption expenditure grew by 15.6% in Q2 as against 8.8% in Q1.

5. In gross value-added terms (GVA), the economy grew at 4.3% compared to 4.9% in the previous quarter.

6. According to the Centre for Monitoring Indian Economy (CMIE), unemployment rate had touched a three-year high of 8.45% in October 2019.

7. According to the Consumer Pyramids Household Survey of the CMIE, the labor force participation rates shrank to its lowest level since January 2016.

Why does the situation exist?

1. Investment demand has been affected by corporate indebtedness, risk aversion by banks, and the crisis in the non-banking financial companies.

2. The credit conditions are tight because of supply-side problem, and global conditions.

3. Longer period of demand slowdown resulted in a long period of lower capacity utilization, a delay in investment cycle, and a decline in long term potential growth.

4. Productive sectors like agriculture, manufacturing, electricity, construction and other public utilities have shown signs of a setback in growth.

5. Slowdown has affected the informal sectors and labour market as well.

6. Jobs and income losses have depressed consumption demand due to rural distress.

7. Steps to boost demand has not happened yet.

How to address the issue?

1. There is an urgent need to prioritize the rural sector.

2. Improper implementation of Pradhan Mantri Kisan Samman Nidhi (PM-Kisan) yojana and the pending dues for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) need to be addressed.

3. Employment creation to generate income and consumption revival is needed to boost the slow-paced economy.

4. Easy domestic financial conditions, positive fiscal impulses, and easing of supply loopholes should be done.

5. An expansive fiscal policy that acts as a countercyclical stabilizer can increase the aggregate demand as monetary policy works best when the transmission is smooth.

6. Government should relax its fiscal deficit target. Reduction in government spending will bring down the growth rate even further.