Economy outlook still cloudy: 

Economy outlook still cloudy: 

Context:

The government move to published economic data for the April to June quarter of this year needs a look

Introduction:

•  The real growth of GDP, after removing the impact of inflation, was only 5.7%, much lower than expected.
• For the past six consecutive quarters, the growth rate has gone down steadily, from 9.2% at the end of the quarter ending March 2016, to 7.9%, 7.5%, 7.0%,, 6.1% and now 5.7% at the end of the June quarter.
• Inflation has been moderate, and touched a low of 1.5% recently.
• Both trade and fiscal deficit are moderate and manageable.
• Oil prices, the ban of the Indian economy, have been stable  and comfortably low.

Background

According to the Economic Survey, if the growth rate will be below 7% this fiscal year. That would be a potential loss of 1% growth. It also signifies millions of jobs not created.

Low manufacturing sector:

•  The manufacturing growth stood at 1.2% is the lowest in the past five years.
• The decline was caused supposedly by the suspension of manufacturing activity prior to the rollout of the Goods and Services Tax(GST) in July, and consequent de-stocking of inventory.
• A State Bank of India report said that credit growth for the year ending last March was the lowest in 63 years.

GDP measure:

The GDP is measured in two different ways:

1-By looking at the production side

2-By looking at the spending side.

Problems:

•  The capital formation is steadily declining for several years.
•  Private sector investment has practically come to a standstill.
• Despite the push for ‘Make-in-India’, reforms for improving ‘Ease of Doing Business’ , increased access to electricity, improvement in infrastructure and private investment are not picking up
• The corporate sector and banks have been affected by the twin balance sheet squeeze wherein corporates are over-leveraged, and banks have mounting bad loans.

Challenges:

• The most significant challenge to the domestic industry is the ever-strengthening rupee.
• Since January the rupee is 7% stronger compared to the American dollar.
• The rupee is stronger than its Asian peer currencies too, including China, the Phillippines, Indonesia and Thailand.
• Our exports are barely up 12% since January, whereas imports are up more than 30%.
• The GST regime has given an extra advantage to importer traders since the countervailing duty that they now pay as GST can be offset against other taxes, a concession which was not available earlier.
• India is a net importing country; our exchange rate should be stronger.
• If gold imports is removed, a large part of which is not for consumption but as store of value, then our trade deficit will be much smaller.
• The rupee needs to be weakened or else it will hurt domestic manufacturing even more.

Impacts of Demonetisation:

• Half of the last fiscal year, that is prior to demonetization, recorded a real growth of 7.7%.
• The current April to June quarter’s growth is 5.7% certainly includes the negative impact on the informal and rural economy.
•  Investment and consumption spending were postponed due to cash shortage.
• The Economic Survey warns about the deflationary impact of low agricultural prices.
• The agriculture sector GDP shows nominal GDP growth to be lower than real DGP

Solutions:

• The growth in GDP can be traced to the growth and vigour of each of these components.
• Investment, which is between 30 and 35% of total pie, needs to grow at least in double digits.
• Investment in future capacity creates GDP growth of the future. It needs to be led by the private sector.
• Presently, that component is barely growing at 1.5%.
• Initiatives such as Housing For All, Smart Cities and Digital India give room for huge opportunities for private entrepreneurs.

Conclusion:

• The big structural reforms of GST, the new insolvency code, the new monetary framework and Aadhaar linkage are measures which will show desired results in long run.