Causes for the Present Slowdown in the Indian Economy

Much has been written and said about the ongoing economic slowdown in the Indian Economy. What was being indirectly said about several economic indicators flashing warning signals for the last year or so, what has triggered the present criticism is the GDP (Gross Domestic Product) figures for the last quarter which came in at 5.7% and suddenly brought the issue into a full public glare.

Indeed, given the fact that India was touted as the Fastest Growing Developing Country for the last two years, the slowdown has also caught many of those making such claims by surprise.

Collapse in Private Consumption and Investment Freeze Leading to Double Whammy

So, what are the reasons for the present slowdown in the Indian Economy? To start with, private consumption has taken a beating due to Demonetization as consumers suddenly prefer to hoard cash or keep it in the bank instead of spending on consumer goods.

Moreover, demand has also collapsed in the rural areas as the entire rural economy runs on cash and Demonetization led to the loss of jobs as well as incomes thereby squeezing the rural consumer who now prefers to wait and watch as well as postpone consumption except that of essential goods and services.

Next, Demonetization has also led to small and medium businesses or the so-called SMEs to withhold investment since they too operate on a cash basis and the cash crunch has left them high and dry.

The Effect of Demonetization

Indeed, Demonetization can be said to have contributed too much of the slowdown as the Double Whammy of demand collapsing, and supply bottlenecks mean that there is a broad slowdown across the entire value chain of the demand and supply dynamics.

Thus, what we have is a situation wherein cash has dried up leading to a slowdown in the economy.

One must also take note of the fact that it is not only private consumption and small enterprises causing the slowdown.

Indeed, the Big Corporates are as much to blame since they are drowning in debt that they accumulated during the Boom Years of the first decade of the 21st century.

It is also a fact that this has contributed to a freeze on investment by industrial houses and corporates who are now paying down the debt or postponing debt repayments to ensure that their present cash flow is sufficient to remain in business.

Too Much Debt

Added to this is the fact that most Public Sector Banks are saddled with high NPAs or Non Performing Assets that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans.

Indeed, absent recapitalization of such banks by the government, one might very well see a vicious cycle wherein bad debts and demand collapse lead to no lending and no fresh investment in addition to any consumption.

The cycle has to be broken somewhere, and this is where the Government and the RBI or the Reserve Bank of India have to take concerted action.

Rollout of GST

Fourth, the fact that the rollout of the GST or the Goods and Services Tax on a nationwide basis has led to the slowdown cannot be denied.

Indeed, GST has hampered the small businesses more than Demonetization by forcing them to withhold inventory until they migrate to the GSTN or the GST Network and become compliant with the numerous rules and regulations that are part of this tax.

It can be said that the implementation of GST is also flawed thereby exacerbating some of the factors that have contributed to the slowdown.

Global Slowdown

It is not these factors alone, and the most important factor is that there is also a global economic slowdown that is happening and given the fact that India is a net commodity exporter, there has been a slump in the volumes of exports.

Apart from that, the global slowdown has also been accompanied by a retreat of globalization which has resulted in FDI or Foreign Direct Investment being only in the areas of speculative finance and distressed assets purchases rather than into investments that help the Real Economy.

Thus, it can be said that ongoing global headwinds also have contributed to the slowdown in the Indian Economy.

Retreat of Globalization

Hence, what the slowdown means for professionals and fresh graduates is that they would be finding it harder to land jobs as well as see their salaries rise year on year basis. In addition, the policies of the Trump Administration have contributed to a decline in the number of students and professionals going to the United States and added to this, Brexit uncertainties have compounded the situation.

It looks as though that the combined effect of all these factors means that the Indian Economy is likely to remain in the doldrums for some time to come.

Ride out the Storm

Lastly, the slowdown is also part of a longer-term structural shift wherein the Economy is shifting gears from the high investment era to a low investment era as well as a transition from being cash-driven economy to a digitally enabled economy.

Indeed, this can be seen most in the Real Estate Sector that has come to a grind in recent months and hence, has also contributed to the slowdown. All in all, all the factors have caused a Perfect Storm for the Indian Economy, and there has to be a time lag before one can reasonably and realistically expect a turnaround.

To conclude, the best option now for all stakeholders would be to Ride out the Storm.

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