With this fiscal's estimated GDP growth set to be the lowest in 11 years, here’s a look at how it will impact the common man
The GDP can’t be taken as just another routine economic data government puts out; it is a vital summary of the real economic activity on the ground
Slowing growth means more companies coming under stress and that is bad news for banks that are still fighting the ghost of bad loans that have originated in the past
The persisting slowdown will also mean that unemployment will rise further, which will directly impact millions of youngsters entering the job market every year
The 5 percent advance estimate, which puts growth at the lowest in 11 years, is no surprise; even the RBI’s revised GDP growth estimate pegged the growth for the fiscal to 5 percent from an earlier estimate of 6.1 percent
India’s Gross Domestic Product (GDP) is expected to grow at the lowest rate in 11 years this fiscal, said the first advance estimate by the government on Tuesday. What does it mean for you and me? The GDP can’t be taken as just another routine economic data government puts out; it is a vital summary of the real economic activity on the ground.
Slowing growth means more companies coming under stress. That is bad news for banks that are still fighting the ghost of bad loans that have originated in the past. Banks may see fresh bad loans emerging from small and medium-sized companies (the large ones are already accounted for through NCLT courts). The Reserve Bank of India's (RBI) financial stability report estimates gross NPAs of banks to touch 9.9 percent by September 2020. The actual figure may end up even higher since the performance of bank loans to companies is closely linked to the economy.
The persisting slowdown will also mean that unemployment will rise further, which will directly impact millions of youngsters entering the job market every year. According to Centre for Monitoring Indian Economy (CMIE), India’s unemployment rose to 7.7 percent in December. The grim economic situation would further weigh on consumer confidence that will further delay growth. This is because people will cut down spending on goods and services, translating to lower revenues for companies and lower tax collection to government.
More pain likely?
In all probability, the first advance estimate for FY20 GDP growth put out by the government on Tuesday will still prove to be an overestimate of the actual growth scenario. The actual growth for the full year is likely to end up below 5 percent considering the biggest driver of growth in recent quarters, government spending is unlikely to continue at the same pace due to the tight fiscal situation. The government is running with a huge revenue shortfall.
The 5 percent advance estimate, which puts growth at the lowest in 11 years, is no surprise; even the RBI’s revised GDP growth estimate pegged the growth for the fiscal to 5 percent from an earlier estimate of 6.1 percent.
Similarly, a clutch of private forecasters and even the International Monetary Fund (IMF) had indicated that the country’s growth may slip below 5 percent this fiscal. The numbers confirm the serious state of the economy, being pulled down by both global and domestic factors. The manufacturing sector, a key segment for employment, is among the worst performers. The manufacturing sector growth is expected to come down to 2 percent in 2019-20 from 6.2 percent in the year-ago fiscal.
Similarly, the industry is estimated to grow at 2.5 percent in FY20 as compared to 6.9 percent in FY19
due to lacklustre performance in all the sub-sectors.This will be mainly on account of a likely poor show in manufacturing and construction (from 8.7 percent in FY19 to 3.2 percent in FY20).
Ball in government’s court
The steep decline in GDP growth puts the government in a dilemma. The pressure will be even higher now to keep spending high to support the growth, which will then mean the government will have to deviate from the path of fiscal consolidation. A Reuters report https://economictimes.indiatimes.com/news/economy/indicators/india-plans-to-cut-spending-to-curb-deficit-may-hurt-growth/articleshow/73131664.cms?from=mdr, which quoted unnamed government officials, said on Tuesday that the government is likely to cut spending by as much as Rs 2 lakh crore this fiscal on account of revenue shortfall. The idea, the report said, is to keep the fiscal deficit within ‘acceptable limits’. But cutting back spending will further hamper growth. At a time when the economy is showing signs of a serious slowdown, merely focusing on fiscal deficit targets will not be a good idea.
According to an SBI research report, in Q2, government spending alone accounted for 40 percent of the entire quarter’s growth. However, this momentum is unlikely to persist given that the government has already announced its intention of cutting expenditure. If it sticks to that stance, growth will suffer further.
What the govt should focus on
There are both global and domestic reasons why growth has slowed over the last six years. But it is time for the Narendra Modi government to take stock of how its ill-judged policy actions such as demonetisation and flawed implementation of the Goods and Services Tax (GST) contributed to the sharp deterioration in the economy. The 2016 demonetisation broke the back of India’s informal economy and dealt a hard blow to the cash-dominated rural economy. Many small businesses shut shop. Since then, the government has attempted to boost sentiment through several small sector-specific steps, but none has shown desired results yet. Moreover, it has so far distanced itself from politically-sensitive land and labour reforms.
At 5 percent, India’s growth is the lowest in 11 years. If one look at the nominal GDP growth, at 7.5 percent it is at a 42-year low. At this rate, it is impossible for the economy to achieve the $5 trillion economy size the government is hoping for.
From a 7-8 percent growth a few years ago, the Indian economy has lost a lot of momentum. With private sector still on the sidelines and government’s ability to spend impacted due to the tight fiscal situation, it is unlikely that growth will recover anytime soon. Is sub-5 percent growth turning the new normal for Asia’s third-largest economy?
Data support by Kishor Kadam
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