Analyzing India’s Economic Slowdown and Policy Responses

Source: The post Analyzing India’s Economic Slowdown and Policy Responses has been created, based on the article “Bring on the rate cut” published in “Indian Express” on 4th December 2024

UPSC Syllabus Topic: GS Paper3- Economy-growth, development and employment.

Context: The article discusses India’s economic slowdown and policy responses. It highlights factors like high interest rates, manufacturing slowdown, and the need for better fiscal and monetary coordination. It emphasizes the importance of targeted reforms, especially in agriculture and food supply chains, to sustain growth. Analyzing India’s Economic Slowdown and Policy Responses.

For detailed information on India’s Economic Slowdown and Path to Recovery read Article1, Article2

What caused the economic slowdown in India?

1. High real policy rates: Persistent real policy rates higher than unity led to a slowdown in durable consumption, especially among first-time salary earners. Manufacturing and construction, which are interest-sensitive sectors, saw the largest growth slowdown. Like, Firms preferred earning treasury income rather than expanding capacity.
2. Lack of counter-cyclical policies: Domestic policy did not respond adequately to the falling export growth by boosting domestic demand. This imbalance contributed to the economic slowdown.
3. Simultaneous tightening of policies: Government spending slowed due to the election, while macro-prudential policies tightened in overheated areas. However, monetary policy did not ease to counterbalance these actions.
4. Consumption patterns: Despite the K-shaped recovery, private consumption grew at 6% this year, up from 4% last year, showing the slowdown was cyclical. Example: Services continued to grow, indicating a recovery in certain sectors.
5. Inflation and high interest rates: High inflation expectations and tight liquidity also contributed to slow growth.

What role do global factors play in India’s growth?

1. Global shocks from U.S. policy: The article mentions that U.S. policy under Donald Trump could lead to global shocks, which would require counter-cyclical domestic policies in India.
2. Impact of global inflation: Global inflation, particularly due to food and fuel prices, affects India’s domestic inflation and economic growth.
3. Export growth slowdown: India’s export growth has been affected by external factors, further highlighting the impact of global conditions on India’s economy.

What can be done to improve the economy?

1. Monetary policy adjustments: A policy rate cut is long overdue to boost demand. High real rates need to be reduced. Cutting rates will help reduce liquidity pressure and support growth.
2. Fiscal reforms in agriculture: Restructure agricultural policies to shift consumer demand to non-grain food items. Like, spending more on vegetables and reducing barriers to private participation in supply chains.
3. Better coordination of policies: Improve fiscal and monetary coordination to ensure smooth growth. The government should support demand while monetary policy should ease when needed.
4. Encourage investment and employment: Induce firms to invest and employ more by ensuring steady growth.

Question for practice:

Examine the key factors contributing to India’s economic slowdown and the policy measures needed to address them.