From Jan-March 2019 to July- Sep 2019, the Indian economy received a steep fall in its gross domestic product from 8.2% to 4.5%. Reasons for this economic trend seem to encompass many; however, can also be summarized for the purpose of a basic understanding of the situation at hand.
One of the major reasons talked about by the experts is the “contractionary” effect of policies such as demonetization and GST, done to “clean” the economy. Prof. R Nagraj, an economist at the Indira Gandhi Institute for Development Research points that pre-demonetization level of GDP constituting the involvement of the informal/unorganized sector, employing up to 90% of the total workforce, ran on cash transactions only with Rs.1000 and Rs. 500 making up 86.4% of the total currency in circulation. The policy shock also did not fulfill its aim to reduce dependency on cash money and switch to
Digital transactions. The GST, which was implemented to improve India’s tax collection system, also contributed to financial problems of the governments and the sharing of revenue between the centre and the states.
Next comes the role of the inflation targeting procedure under the RBI’s monetary policy, which pays more attention to inflation targeting rather than the dual mandate role comprising both inflation and price path targeting. This causes problems of “stack-flation” which explains how liquidity and unemployment problems aren’t taken care of, popularly theorized by C. Rangarajan, as a result of poor monetary policy targeting by the Central Bank. There is also the “triple balance sheet” problem explaining the management concerning the books of corporates, banks and the government and how it becomes difficult to manage fiscal policy with all three increasing combined pressure on it.
There is also the problem of “bad lending” in the economy taken up banks, which lead to their insolvency, as risky businesses increase and create economic inefficiency. The Insolvency and Bankruptcy code of 2016, which aims to protect the interests of small investors at a time of insolvency, continues with the process of “bad lending”, and is recognized to be a long term solution rather than a short term one. The McKinsey report shows how more than 50 percent of the 23,000 unlisted companies comprise GSMES are in no position to serve their debts. This adds to the problem of unsecured loans that increase risks in the economy. Therefore, there has to be more caution in dealing with lending by banks.
Coming to the paths of recovery, leaders and experts remain hopeful that this economic shock is not permanent and that India will rise up again on its path to achieving economic growth and progress. Their views and suggestions for the Indian economy include making improvements in structural reforms like how the telecommunication sector boomed under the Atal Bihari Vajpaayee regime because he laid a strong focus on reforms. There need to be more focus given to Research and Development sector that will boost private consumption and create demand in the economy which will help in reducing the gap between our exports and imports and hence reduce the current account deficit. Hence, privatization policies should also come into the picture in driving demand. On the topic of tax reforms, there should also be a system of
giving incentives to honest taxpayers to boost private consumption. When it comes to agriculture, a popular occupation in India, there should be more ease provided to evade transactions costs as the farmer’s produce is sold. Improvement in higher education, which also majorly contributes the R&D sector, should be given importance to enhance productivity. Measures should be taken to also avoid problems of inequality of “access” to justice and women safety that continue to aid to the slowdown.
NITI Ayog, the think tank of the Government of India gives hope along the lines of recovery for India to jump back on its path to progress. The sustainable development goals like SDG-8 aims to improve women participation and unemployment conditions. SDG-9 focuses on industrial innovation and infrastructure. Various examples of schemes like Gram Sadak Yojana, Swatchh Bharat, and many other schemes concerning digital transformation, strengthening intellectual property regime and improving infrastructure in cities, especially in terms of waste management techniques are now functioning as a result of improvement in R&D. The government is also planning to improve economic growth along with improving carbon neutrality, with climate change also being one of its focusing challenges to deal with. India, thus, continues to struggle with its challenging targets as a developing country which makes its growth rate all the more competitive compared to that of the developed countries, giving hope for its current slowdown to terminate soon.
Snehal Sreedhar is an undergraduate student of Ashoka University, pursuing her major degree in Economics.