– Smriti Agarwal
The Narendra Modi government committed to make India a 5 trillion dollar economy in the last five years. But it seems that the economy is losing steam. The economy of India is characterized as a developing market economy however, it is facing the worst slowdown in the last five years.
A glance of the current economic condition –
The IMF (International Monetary Fund) predicted India to grow at a rate of 7.2% in FY20, but the recent data reveals the GDP growth had fallen to as low to 4.5%.
The overall growth for the FY19 slumped down to a five year low of 6.8% as compared with 7% projected in FY18.
So, what are the reasons for the present scenario? And how this situation can be resolved?
Causes for the downfall of the economy-
- Private Consumption Collapse and Freeze of Investments –
Private consumption of both the urban and rural areas collapsed as after demonetization people preferred to hoard cash in banks instead of spending on consumer goods. The small and medium enterprises (SMEs) freezed its investment as they operate on cash basis and demonetization left the nation in a cash crunch.
- Demonetization Effect- Demonetization has left India high and dry. Big corporate houses have been freezing their investments too in order to repay their debts or to postpone it, to ensure they have sufficient cash flow to remain in the business.
- Rising Debt Levels – The Public Sector Banks (PSBs) are saddled with high Non-Performing Assets(NPAs) and due to lack of government investment in these banks, the lending of these banks have tightened, forming a vicious cycle of no lending and investments.
- Introduction of GST- The implementation of GST has made it mandatory for the small businesses to hold on their inventory until they migrate to the GSTN and become compliant with the numerous rules and regulations that are part of the tax, which has exacerbated the slowdown.
- Global Slowdown- As the global economy has also slowed down and India is one of the major exporters, there has been a decline in the volumes of exports. Apart from this, the Trump Administration has contributed to a decline in the number of students and professionals going to the US. These global headwinds have led to a further decline in the Indian economy.
- Structural Shifts – Our economy has shifted from the high investment era to a low investment era as well as shifted from a cash-driven economy to a digitally-driven one, bringing a perfect storm for our economy which can be especially seen in The Real Estate Sector.
Solution to the problem-
Growth as momentum and slowdown has inertia. This slowdown can be reversed if only both long-term and short-term steps are taken by the government. However, some immediate steps which can be taken are-
- Reducing GST slab rates and changing GST collection to quarterly for companies below Rs.1 crore as well as by adopting the Direct Tax Code , in order to cut income tax for bottom slabs.
- Improving credit flow for both consumer and industry as well by changing the credit culture in the Public Sector Banks (PSBs).
- Providing incentives to the auto sector and its employees, in order to invest and upskill the auto sector.