RAMANUJAN COLLEGE

(University of Delhi)

ECONOMICS

CASE STUDY ASSIGNMENT & ANALYSIS

TOPIC: “The Dynamics of India’s Growth

Slowdown”
Submitted by-
Vivek Verma
Roll no- 106
Current situation

India is facing an economic crisis. The former PM Manmohan Singh has said demonetisation and
faulty implementation of GST have triggered this slowdown. With major revision of Indian GDP
growth forecasts by dominant international institutions and credit rating agencies, Indian growth
story seems to hit a recessionary bump. IMF has revised Indian growth forecast by almost 1.5% to
around 6%, some rating agencies even suggesting growth rate of 5% for current financial year. This
of course is no surprise given the slowdown in automobile sector, slow credit growth, fall in tractor
purchases, slowdown in real estate and construction activities. Automobile sector has been one of
the shiniest one in India growth story, decline in this sector also show slowdown in steel industry
and other industries associated with it. This has resulted in RBI continuously lowering down repo
rate from the start of the year, recent cut being the highest one of 135 basis point, still credit front is
at standstill and this has not persuaded peoples to take more home loans etc. Govt has reported
that tax collection is down by 25% but with current scenario any new tax imposition could be
considered as investment halting measures by industrialists, especially the foreign industrialist which
the govt is so keen on to attract. Apart from all this slowdown in consumer spending is also well
reported which clearly signals the slowdown in aggregated demand.

Slowdown in construction sector should be of the utmost concerns since it is a sector which provides
employment to big masses especially labours from rural areas who migrates to cities and lives near
construction sites apart from whole bunch of construction jobs.

Rural sector which employs nearly 45-47 % of country labour force deserves most importance,
slowdown in fertilizers & pesticides purchase shows that things are no good at rural front. Rural
sector den of disguised unemployed people has found it relief measure in the form NREGA in 2005.
This has shifted many rural families to do work in community construction programmes during off
seasons. But with continual decline of fund allocated to NREGA it is no surprise that many of the
workers still waiting to be paid for the work they had done, partly because govt has changed it
priorities. This neglect other concerns regarding the wages received in NREGA to be around 30-40%
of minimum wages prescribed in states, except two states (Kerala of course the obvious one in that
list).

At the international front things are not rosy too with rupee continuous fall against the dollar and
financial outflow from the country signalling the speculative investors are now concerning US as
their safe home base because of the protectionist measures taken by the Trump administration and
raising of interest rate by FED.
GOVT RESPONSE

Govt respond to situation has been largely in one direction that is to pump liquidity into the system
in different forms ranging from continual decline in repo rate, or massive tax bonanza to corporate
firms, organizing credit melas etc, tax relief to new firms, tax relief on capital gains etc. But even
after all this current situation seems to be paralyzed.

This can be attributed to many factors

One of them could be a meagre pass of fall in lending cost to final consumer by banks. Dealing with
large NPA issue most banks is unwilling to pass rate cut to the loan holders due to which credit
growth has not responded much.

Persistent job cuts in private and public sphere also had a dampening effect on aggregated demand.
Recently UP government has ended services of 25000 home guards. These kinds of move are of no
help in time of recessionary pressures.

Persistent effort by present government to keep the fiscal deficit target has only eroded government
ability to deal with present crises. Sticking to decade old idea of government should finance all of its
expenditure from its own income, initially put forward by British treasury will not help to curtail the
current recession as it is partly based on false suppositions of a fixed pool of saving at particular time
in an economy from which if government borrows its crowd out funds for private investor without
recognizing saving created out of those expenditure still be in the hands of private investors. This
was described by Joan Robinson has “humbug of finance “.

Fall in GST anticipated revenue because of cascading effects of different slabs and whole mechanism
of filing it further reduce government ability to cope with present situation which for the moment
financed by government by siphoning of fund from RBI of an equivalent amount. But it will only
prevent government from not meeting its proposed expenditures plans not enabling it to create new
expenditure to revive economy.

Continuously falling rupee against the dollar has further eroded international finance trust in Indian
stock markets convertible returns coinciding with an increase in current account deficit from 1.5% to
around 2.4% with the further trouble looming in the near future because of large import bills due to
oil price hike.
HOW TO REVIVE INDIAN ECONOMY

Revive Agriculture: Government must find innovative ways to kickstart rural consumption and revive
agriculture

- Bringing reforms in the agriculture sector (especially in the short term)

- Providing more loans to the farmers
- Better MSP

Manufacturing sector: Manufacturing sector needs a major boost.

- Providing GST cut in the automobile sector which is in deep trouble.

- Cut down in corporate tax to 25% for all the businesses.
- The fear among corporates regarding Tax Terrorism needs to go away.

BOOSTING DEMAND

REAL ESTATE, CONSTRUCTION: Real estate and construction sectors provides employment to a large
number of people but many workers are now sitting unemployed – a key reason why demand has
fallen. So, reviving demand in realty and construction could steer the economy revival.

BOOSTING MSMES, EMPLOYMENT: It would be almost impossible to tackle the slowdown without
reviving small scale enterprises. A recent SBI study has shown tat wage growth has declined
significantly. Thus, injecting more liquidity into the system is the need of the hour. NBFC is still
reluctant on lending to businesses.

HIGHER LENDING THAN JUST MERGERS: Mergers may not play a decisive role in economic revival.
Higher lending to the businesses is the need of the hour.

RATIONALISE GST: Manmohan Singh and several sectors including the ailing auto industry advised
the government to rationalise GST rates even if it leads to short-term revenue loss.

RECOGNISE EXPORT OPPORTUNITIES: the government should recognise new export opportunities
that arise out of the trade tussle between the US and China. the government has to find
opportunities to attract private investments.