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GDP Declines to a Record Six-Year Low of 5%: Implications of the Economic Slowdown for the Indian Economy

By Finserv MARKETS - Dec 25,2019
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The Gross Domestic Product (GDP) growth for the first quarter of the financial year, 2019-2020 has decreased to 5%, which is an all-time low in the last six years. This is 0.8% lower when compared to the growth rate for the fourth quarter of the financial year 2018-2019, from January to March 2019. This downturn in the Indian economy has particularly affected the manufacturing, automobile and real estate sector.

GDP declines to a record six-year low of 5%: Implications of the economic slowdown for the Indian economy
Understanding GDP: Gross Domestic Product is the monetary measure of the market value of all final goods and services produced in a specific time period. To put it simply, GDP measures the economic output of a country during a particular time period. The GDP growth rate measures the rate of growth of a country’s economy by comparing one-quarter time-period with another. The four main driving factors of GDP growth rate are:

  1. Personal consumption.
  2. Retail sales.
  3. Government spending.
  4. Net trade.

Reasons for the economic slowdown: The major reasons for the slump in the Indian economy are:

  • Uncertainty in world economy because of US-China trade war
  • Brexit concern, where the UK is expected to exit the European Union By October 31, 2019
  • A decline in consumption in the market, especially in rural areas
  • A decrease in purchasing power
  • Cyclical nature of the slowdown

The slowdown has been compounded by the refusal of banks to lower lending rates. Despite the decrease in repo rate or the rate at which RBI lends money to commercial banks, banks are still circumspect to extend credit facilities. This is because of the liquidity crunch and bad loan crisis being faced by the banks.

Here is a look at how the economic slowdown has affected various sectors of the Indian economy.

Automobile industry: The Indian automobile industry, which ranks fourth in global sales, been facing a crisis-like situation since the last 10 months because of a decrease in demand. In August 2019, the major car manufacturers in India recorded a negative sales number.

Eight core sectors: There are eight core sector industries in India:

  • Coal
  • Crude oil
  • Natural gas
  • Refinery products
  • Fertiliser
  • Steel
  • Cement
  • Electricity

These eight core sector industries registered a 2.1% growth in July 2019 as compared to the 7.3% growth in July 2018. The slowdown was because of the contraction in demand of these industries.

Real estate: The real estate sector, which supports over 250 associated industries like cement, steel, electrical spares, furniture, bricks and several others is in a slump because of liquidity crunch, a default in payment by builders and increase in property prices. Real estate research companies have said that the unsold inventory stands at 42 months as against the established norms of between 8 and 12 months. This means that it will take more than three years to sell the existing unsold houses and flats.

FMCG goods: Fast Moving Consumer Goods (FMCGs), which had a thriving demand, especially in rural pockets, have seen a slump ranging up to 50%. The volume growth for FMCG products comprising essential goods like soaps and biscuits have hit a low from April to June 2019 because of decrease in demand from rural markets.

GDP declines to a record six-year low of 5%: Implications of the economic slowdown for the Indian economy
Effects on Indian economy: The slowdown in businesses across the country has resulted in increased job losses. The first casualties of the economic slowdown were the daily wage workers at the outsourced factories or companies. Slowly it has spilled over to junior to middle-level segment jobs in various sectors. According to some reports, around 2.30 lakh jobs were lost in the automobile sector. As per a report of the Society of Indian Automobile Manufacturers (SIAM), 300 dealerships have been shut down, while 10 lakh jobs have been hit in the auto component manufacturing industry. Small and medium-scale industries have also laid-off scores of employees to decrease production costs.

What is the way out?

Economists and experts have suggested a mix of policy reforms, tax-cuts and sector-specific packages for reviving demand. Recently, the finance minister had announced that banks will pass on the full benefits of the RBI’s rate cuts to consumers. Along with an infusion of Rs 70,000 crore in public sector banks, the finance ministry announced the withdrawal of a ‘super-rich surcharge’ imposed on foreign investors along with exemption of start-ups from ‘angel tax.’ While addressing the concerns of the automobile industry on BS-VI emission norms, the finance ministry has deferred the proposed increase in registration fees for new vehicles up to June 2010. The recent transfer of Rs 1.76 lakh crore from RBIs surplus corpus to the government could also help infuse money in the economy. The industry and government is keenly watching the upcoming festive season in the next two months, which could also revive demand.

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