[Answered]The current economic slowdown is a result of both cyclical and structural factors. Comment.

 India is experiencing an economic slowdown for over a year now. India’s real or inflation-adjusted GDP grew at 5% in the June 2019 quarter of financial year 2019-20, the slowest growth in six years. The current slowdown has both cyclical and structural factors behind it. A cyclical slowdown is a period of weak economic growth that occurs at regular intervals. A structural slowdown, is a more deep-rooted phenomenon signifying weak economic growth for over a long time. It occurs due to a shift driven by disruptive technologies, changing demographics, and/or change in consumer behaviour.

Structural factors:

1. Investment: The investment has declined due to less corporate spending and less savings. The household sector, which is the biggest contributor to the total capital expenditure in the economy, has lost steam since demonetisation. Gross Fixed Capital Formation (GFCF), a tool to measure investment in the economy has declined from 34.3% in 2011 to 28.8% in 2018. Similarly, in the private sector, it has declined from 26.9 per cent in 2011 to 21.4 per cent in 2018.
2. Failure of the Insolvency and Bankruptcy Code (IBC): IBC has met limited success. It has been unable to resolve insolvency Cases in a time-bound manner. Therefore it has led to limited resolution of Non-performing assets and cases.
3. Unemployment: Unemployment is all time high and has impacted the buying ability of individuals. With increased automatised production and inability of manufacturing sector to boost up the growth has impacted job growth of the country.
4. Inefficient agricultural policies: Inefficient agricultural policy has led to excess surplus production of certain agricultural commodities. A case in point is India’s sugar production. This, in turn, contributes to low farmer incomes. Lowered rural income has affected the consumption and demand in rural India. This is reflected in the slump in the FMCG sector.

Cyclical factors:

1. Consumption: Private consumption, which contributes nearly 55-60% to India’s GDP has been slowing down. The reduced income growth of households has reduced urban consumption. Drought/near-drought conditions in three of the past five years coupled with the collapse of food prices has taken a heavy toll on rural consumption. For example, the recent slowdown in motorcycle sales is an indicator of poor rural demand and a slowdown in automobile sales is an indicator of poor urban demand.
2. Savings: Savings by household sector which are used to extend loans for investment have gone down from 35% (FY12) to 17.2% (FY18). Since households are the only net savers in the economy, their savings are major contributors towards investment. These savings have now reached a level which isn’t adequate to fund the government borrowings, adding to the current economic slowdown.
3. Rising global trade tension: Recent trade war between the US and China and other global trade wars has impacted growth all over the world. It has impacted manufacturing and exports in different parts of the world, impacting Indian economy too. Currently, there is a tendency towards protectionism, unilateral trade decision and a tendency to reverse the globalisation measures.
4. NBFC failures: Recent failure of Non-Banking Finance Companies (NBFCs) which had stepped in to support credit growth has resulted in restricted growth to ensure survival, as a result of which system- wide credit growth has slowed sharply. NBFCs are the major loan provider to MSMEs which in turn are dependent on domestic consumption. Since the NBFCs are in problem so does the MSME sector.
5. Monsoon: Poor monsoon performance has led to a lower area under cultivation. This, in turn, has led to lower output and consequently, lower rural income generation. This is a consequence of high dependence on monsoons by Indian agriculture.
6. Oil: Oil is a major driver of the economy. A country’s oil demand and consumption give a clear insight into its growth rate. Given the tensions in the Gulf of Hormuz and also US’s CATSA policy, India’s cheaper oil imports from Iran have been disturbed.

Recent Steps Taken:

1. Subsequent rate cuts by RBI to lower the interest rate. The RBI has cut the repo rate by 110 basis points so far in 2019 to 5.4%.
2. Stimulus package announced by the government along with other measures to propel demand and thus help the economy to recover.
3. Surplus transfer by the RBI to the government would help boost planned-spending of the government without compromising fiscal deficit targets. It would also help in
4. Recapitalising Public sector Banks to tackle the NPA crisis.
5. Merger of Public sector Banks would enhance the credit culture and thus spur investment in the economy.

Way Forward:

1. Credit and liquidity issues need to be addressed first and foremost. Lack of capital would bring the economy to a grinding halt as the markets cannot depend solely on demand to be a driver.
2. The slowdown shows that the country needs to develop strong buffers to hold up against such wide-reaching global spill-overs.
3. India should strive for multilateral solutions as opposed to unilateral ones. For this an integrated approach is needed. For example, to boost exports India must focus on increasing its product quality and price along with making a pact with other countries.
4. RBI recommends the Integrated Policy Framework (IPF) of IMF’s global policy agenda as a way forward by jointly considering monetary, exchange rate, macro-prudential and capital flow management policies and their interactions. The effectiveness of this strategy will depend on cooperation from all stakeholders.
5. India needs to focus on engineering an export policy that suits the times. Global demand is the key determinant of export performance. The increase in unilateral trade actions calls for a robust export strategy.

Under the current macro environment, monetary policy seems to be less effective than fiscal policy as ‘improper transmission mechanism’ fails to pass on benefits to the real economy. A broad-based downturn in several sectors, including manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture, and call for actions in terms of monetary and fiscal policies, along with deep-seated reforms for the structural slowdown. There are structural issues in land, labour, agricultural marketing which need to be addressed.