At 5 per cent, India’s economy registered its slowest gross domestic product (GDP) growth rate since the Narendra Modi government was first voted to power in 2014. The latest GDP growth rate heightened concerns about slowdown with some apprehending that recession might set in.
A recession is defined in economics as three consecutive quarters of contraction in GDP. But since India is a large developing economy, contraction is a rarity. In case of India, the economy continues to grow but at a slower pace than usual for a sustained period of time. The technical term for the same is growth recession.
The growth of the Indian economy had been predominated by consumption inclusive of both — Private Final Consumption Expenditure (PFCE) as well as the Government Final Consumption Expenditure (GFCE). If consumption spending falls, then output and employment levels also fall since consumption expenditure directly impacts the other two. As a consequence, the economy would stagnate, and prices deflate. Lower prices, if unable to recover the costs, would halt the operations of any firm and would initiate the layoff process. This, in turn, reduces earnings further. Hence this vicious cycle keeps on repeating itself until the economy slips into a deeper state of shock.
In addition, another major component of India’s GDP is investment, induced by both — private and government sectors. The slackening of investment lowers the level of infrastructure development, causes hesitation in creating small businesses, stop entrepreneurs from investing in research and development, and thus stagnates technological development. For holistic growth of the economy and to gain competitive edge over others, the economy must innovate. And innovation is encouraged by investment in research and development.
In addition to these factors, the slump in the economy is also affected by the various exogenous factors. A leading dampener is the US-China trade war, which has intensified over time and has contracted world trade and, in turn, Indian exports. Also, high rates of GST, liquidity crisis in NBFCs, and shift in the behavioural pattern of the workforce due to the entry of young people has discouraged savings. When people save less in the economy, it leaves less money for investments.
Indian Economy, no doubt is passing through a sluggish economic growth since 2016 post demonetization as compared to earlier years, although efforts are being made to improve the Indian Economy’s growth to achieve the rate which may not be considered as very slow. Government however, is of the opinion that India’s economy has a better growth rate amidst global economic slowdown, if we go by the global economic growth standards. A few of the experts see it as a temporary or technical issue and think that its effects would soon fade out while others view this as a more serious crisis created by a barrage of supply-side shocks to the economy.
The World Bank President Jim Yong Kim said that the Goods and Services Tax (GST) is going to have a hugely positive impact on the Indian economy. According to him, the recent slowdown in India’s economic growth is temporary and is an “aberration” mainly due to the temporary disruptions in preparation for the GST. It will get corrected in the coming months.
Latest policy announcements by the government including withdrawal of super-rich surcharge are likely to bring back investment and create jobs, and hence push demand for consumption. If that happens, it will give a fresh kick to Indian economy.