Is Indian Economy in a Tailspin or Just an Aberration?

The recent headlines on the Indian economy have been stark. The slowdown in the economy is headline news. The comment has been coming  amidst intense criticism in the country over the its economic growth rate slowing down to three-year low of 5.7 per cent in the first quarter ended June due to demonetisation and implementation of GST. Former minister of finance Yashwant Sinha’s article arguing that “the economy…on a downward spiral, is poised for a hard landing” put the cat among the pigeons. There is a slugfest in the media between supporters and critics of the government. Is it time to hit the panic button?

As a student of Economics I started thinking that really Indian economy on the path of doom as critics or opposition parties as prophets of doom are dubbing. Undoubtedly, The Indian economy started going downhill from the June 2016 quarter. The slowdown in the economy is headline news. Growth in gross domestic product (GDP) has plummeted by 3.5 percentage points in just six quarters, from 9.2% in January-March 2016 to 5.7% in April-June 2017 and Gross Value Added is having also declining trend as Table 1 shows.

Table 1: GDP Growth  (%YOY)

Source: Central Statistical Organization

It is essential to recognize that there is a problem and Picture is grey because of Demonetisation, GST and RERA Act since they have serious economic side-effects in the short to medium term, poor consumer demand, low capacity utilization and a bad-asset overhang, non-hiring of workers by SMEs, construction and manufacturing sectors, structural issues faced by farmers, and NPA burden so that there can be a meaningful debate on possible solutions. To be fair, evidence on the recent slowdown in growth must be situated in its longer-term perspective. The period 2003/04-2007/08 witnessed the most rapid sustained GDP growth in India at 8.8% per annum, riding on the boom in the world economy. Then came the bust, as growth dropped to 3.9% in 2008-09. Surprisingly, GDP growth rose to 9.5% per annum during 2009/10-2010/11. This recovery was attributable to counter-cyclical macroeconomic policies, the size of the home market and a financial sector less fragile and more regulated than elsewhere. But the resilience did not last long. Growth slowed to 5.4% per annum during 2011/12-2013/14, as fiscal imbalances mounted, inflation quickened, and the current account deficit in the balance of payments widened.

In retrospect, it is clear that the present National Democratic Alliance (NDA) government inherited a difficult economic situation which was a legacy of the last three years of the United Progressive Alliance (UPA) government. It was good fortune, more than anything else that resolved these problems. The sharp drop in world oil prices, from more than $110 per barrel to less than $50 per barrel, continued as a bonanza for three years. It slashed the current account deficit, brought inflation under control, and helped moderate fiscal deficits. GDP growth also revived to an average level of 7.5% per annum during 2014/15-2016/17.

Domestic criticism of economic growth is not healthy. Nobody outside India is calling this a slowdown. World Bank President Jim Yong Kim had said yesterday that the recent slowdown in India’s economic growth is an “aberration” mainly due to the temporary disruptions in preparation for the Goods and Services Tax (GST) and it will get corrected in the coming months.

The key to a sustainable recovery is the investment cycle. The private sector is still struggling with excess leverage. The banks are struggling with bad debts. Capacity utilization figures show that higher demand can be met through existing capacity. The clean-up of the banks seems to have begun in earnest, though it is hard to see how the job can be done in less than two or three years.

The macroeconomic strategy will thus have to delicately balance between the need to push public investment on the one hand and keep the fiscal deficit under check on the other.

Mithilesh Kumar Sinha
Nagaland University