Understanding the slowdown: 

Understanding the slowdown: 

Context:

• Causes responsible for the slowdown of Indian economy

What are the issues?

• There is a slowdown in Indian economy
• The GDP has lost momentum
• The reasons of slowdown are being explained as beyond the government’s control; that are deficient rains, the sluggish world economy, recent demonetization in the economy and Goods and Services Tax (GST)
• Both the GST and the demonetization failed to bring change in the numbers

What are the four engines of the economy?

• Exports, government investments, private consumption, and private investments

What has happened to the four engines?

• During the United Progressive Alliance’s (UPA) tenure – the four engines powered the economy
• Growth in government investments and private consumption remained on the track until it has started slowing down in the quarter ending June 2017
• Exports and private investments have lost momentum

What is the background?

• Government investments and private consumption depend on how well the economy is doing
• As incomes improve, private spending and tax collections pick up.
• The 2008 financial crisis was a big blow to the export business including India
• Recovery in the global economy has lifted exports of most Asian countries
• Indian export remained stagnated after the crisis
• The overvalued rupee eroded the competitiveness of Indian export

What are the challenges?

• The steps taken for improving the ease of doing business and the foreign investments regime have proved insufficient in restarting the private investments cycle
• The share of investments in GDP GDP has declined steadily for the past five years.
• New jobs are not created
• Without new jobs, consumption will only grow up to a point
• India’s economic future can improve significantly with investments-led growth

Why are investments on hold?

• The returns-risk projections of projects are not favourable
• Companies are not convinced that new factories will be sufficiently profitable
• The government is politically sensitive
• The government has set a low target for consumer price inflation
• The government is unable to progress on land and labour reforms
• Government’s policy on the bad bank has impacted small companies in raising finance
• The environment of constant shocks and unanticipated policy changes is hurting investment sentiment in the economy

Whom to be made responsible?

• There is no policy paralysis
• Decision-making is speedy which demonstrates the growing disconnect between policy tools and objectives
• The demonetization has dragged the slowing down economy
• The complicated design of the GST may have added to the vulnerabilities of the informal sector