Slowdown Blues in India

Rating agency Crisil on Thursday lowered the gross domestic product (GDP) growth forecast by 20 basis points to 6.9% for 2019-20, citing weak monsoon and slowing global growth. This is lower than the 14-year average of 7%. Banks' credit data to some of services sectors such as tourism, hotel and restaurants, transport, computer software, shipping and commercial real estate is showing a declining trend. Data from ICRA too shows that seven out of 16 key segments contracted in the last one year. Out of these 7 segments, 4 segments related to auto industry took the worst hit.

The main culprits for such low growth are as follows:

   1. Reforms like GST & Demonetisation:

Demonetisation happened in November 2016 which led to decrease in consumption, which further caused loss of jobs leading to further decrease of demand. Then came GST in July 2017 which also affected the economy, especially in the area of exports because of delay in refunds to exporters.

       2.Tight fiscal & monetary policies:

To keep the inflation in control, RBI had kept high interest rates. Since 2016, fiscal deficit of centre & state was also running high. To keep this deficit in check, government had to decrease its spending. Both these aspects are detrimental to the growth of economy. Such high interest rates coupled with such tight fiscal policy weakened the economy.

       3.External causes:

 Too much protectionism ultimately constricts global growth. The US-China trade war has caused entire global economy to crumble. According to a Bloomberg Economics report, uncertainty over trade could lower world gross domestic product by 0.6% in 2021 compared to a no-trade-war scenario. IMF reduced its 2019 world growth forecast down to 3.2%; 0.1% point below its previous outlook.

Apart from above reason; in last 2 years of Modi’s first term, crude oil prices have also increased making economic outlook appear bleak.

Then there are uncertainties caused by the Brexit in Europe, the adverse impact of the US sanctions on Iran and Venezuela which have also added woes to the global economy.

       4. NPA woes:

Though NPA ratio started improving in NDA’s term, it is still quite high. At the dawn of 2019, while it seemed that NPA problem has been contained, the NBFC stress started building up. The liquidity crunch happening in NBFC has more ripple effects than public banks as NBFC’s are more deeply interconnected to mutual funds, banks, and corporate sector.

       5.Bad governance:

      India has a cornucopia of freebies and subsidies. Subsidies are warranted for merit goods like basic education, health and safety nets. But 6% of GDP goes to non-merit subsidies, leaving not remotely enough for other key areas. Fiscal deficits have been kept low on paper by accounting tricks. But the total public sector borrowing requirement exceeds 8% of GDP, among the highest in the world. This is one reason for high interest rates that hamper economic growth and exports.

No wonder India is no longer the 5^th biggest economy in the world. Such sluggish economy has caused India to drop down to 7^th place while UK & France marching ahead.

The latest budget has amplified the already slowing growth. Increase in the taxes on the super-rich has complicated the tax system without much gain in revenues. It has been one of the key reason for the flight of foreign portfolio investors in July. FIs pulled out over Rs 12,000 crore in July; the steepest outflow in 9 months.

The budget also raised the peak income tax rate to 42.7%, much higher than in many competitors. Foreign portfolio investors organised as trusts suddenly find they have to pay 42.7% tax, and are exiting, causing a crash in stock markets.