Reasons for slower economic growth of India

Reasons for slower economic growth of India

The recent slowdown in the Indian economy has been blamed on various factors. There is a general consensus that it should be blamed on the structural issues in India's economy, which presents a structural challenge for policymakers to resolve the issue. With structural problems worsening in recent times, the concerns are getting louder.

Reasons for slowdown of economy

Economic analysts perpetually come up with reasons for the slower economic growth of states, countries, and the world economy. There are many reasons for it as:

Crisis in agriculture: India's agricultural sector has been in the doldrums for a long time. In the last decade, there's been a decline. Farmers are losing their land for non-payment of loans or because they're unable to pay for seeds and fertilizers or because they need money to meet farm expenses during emergencies which they borrow from private moneylenders.

De-Industrialisation: The de-industrialization of a country has serious long-term economic consequences. Manufacturing has spillover effects in new areas. No one can deny that there are bottlenecks and serious problems in the country’s growth infrastructure, but de-industrialization is not part of the solution.

Exports: Many experts point out that one of the biggest reasons for the slower economic growth of India for this year is poor export demand.

Consumption: The reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.

Investment: GFCF provides a picture of the total amount of investment being done in the economy. The lower GFCF percentage implies that domestic firms are not investing enough to push economic growth higher. Investments have declined from 34.3% in 2011 to 28.8% in 2018.

Failure of the Insolvency and Bankruptcy Code (IBC): The primary reason for a slower economic growth was due to the failure of the Insolvency and Bankruptcy Code (IBC) which aims to fasten the resolution time of insolvency cases and enable them to be classified as standard or NPA, thus resolving the non-performing assets (NPA) crisis.

Rising global trade tension: The global economy is currently facing a trade war and it will impact the Indian economy as well. Rising trade tensions between the world's two largest economies, the U.S. and China, have fueled a sharp increase in global tariffs on thousands of goods.

Unemployment: Unemployment is at an all-time high and it created hardship and economic pressure for people. It has affected the revenues of major multinational corporations which has further tightened its purse strings. Financial institutions are not lending money on the basis of good credit history. Automobile companies, realtors and other service industries are unable to get money for their projects, investments and loans.

Are tax sops enough to accelerate the economy?

The recent announcement of tax sops for big corporates are not enough as it is only a short-term measure. The government has to start giving incentives to individuals. This is long-term strategy and has the potential to bolster the growth rate significantly.

A credible export agenda requires policy interventions that lie outside the domain of the commerce ministry. These include improvements in infrastructure and logistics, building coastal employment zones, better bank finance for exporters, and most important, labour law reform.

It's not fair to blame the slowdown in our economic growth entirely on the policy paralysis of the current government. The steep decline in growth is due to many other fundamental reasons which are almost impossible to be addressed by convenient shortcuts such as tax sops.

It is important to revive the economy of a country. It is important for the well-being of the people and for growth. When there is an economic downturn or stagnation, the government should use policies that would accelerate the economy and make it healthy again.

Even as the commerce ministry is working overtime to impress upon the world the advantages of doing business in India among other things, it’s clear it needs to go beyond policy interventions and focus on building a robust ecosystem around exports.

Following the unprecedented monetary expansion in the last few years, the Reserve Bank of India (RBI) has finally embarked upon a path of gradual tightening of monetary conditions - after inflation remains elevated even post the demonetization drive.