Raise capital formation: Never let demand down

Source: The post is based on the article “Raise capital formation: Never let demand down” published in the Livemint on 29th December 2022. 

Syllabus: GS3- Indian economy and growth.

Relevance: Issues related to economic growth.

News: The article explains the reasons behind lower GDP growth in pre-pandemic years. It also explains the current economic scenario. 

What are the viewpoints of the current Chief Economic Advisor about the economy? 

GST and demonetisation were not responsible for the pre-pandemic economic slowdown. It was financial sector stress that slowed capital formation.  

Less credit in supply and demand lowered GDP growth. The double balance sheet crisis was responsible for this stress. 

Structural reforms by the government will yield results. Economic policy or reforms will have an impact, provided everything else remains constant. When other things change, their short-term impacts overshadow reforms. 

Why was capital formation one of the major reasons for the pre-pandemic economic slowdown? 

Capital formation has been a weak link in India’s economy in recent decades. It was at its peak rate of 40% during the 2008-09 global recession. The annual rate of investment has fallen to a level of 10% lower. This has led to slower output growth and weak job creation. 

What is the economic situation now? 

Bank stress is easing now.  NPA was at a peak of 11.6% in 2018. It has fallen to a level of 5%. Today the capital looks adequate. Credit growth has reached its highest level in 10 years. 

The weak point is lower consumption expenditure. Demonetisation and complexity of the GST regime have impacted informal and small businesses. It has impacted the livelihoods of the people.