Deepening Economic Slowdown

A strong expansionary fiscal stimulus is needed to revive aggregate demand in the economy.

 

Despite the various measures taken by the government, the slowdown of the Indian economy has deepened further in July–September 2019, with the gross domestic product (GDP) growth in the second quarter of the financial year 2019–20 (Q2 FY 20) at 4.5%, compared to 5% in the first quarter. The growth rate has now slowed down for the sixth consecutive quarter, declining by 3.6 percentage points during this period. In the current GDP series, the growth rate at 4.5% is the lowest since that recorded in the fourth quarter of FY13, which was 4.3%.

What this points to is that the underlying private demand is weak, as the scenario has been progressively getting worse, despite higher government spending. This is because consumption has failed to pick up, and private investment has remained stagnant. On a sequentially adjusted annualised rate basis, the GDP growth is at 3.6%. As per the expenditure trends, the private final consumption expenditure grew by 5% in Q2 compared to 3.1% in Q1. But, this growth is at odds with the evidence coming in from various sectors regarding subdued consumption both in rural as well as urban areas. The gross fixed capital formation grew by 1% in Q2 as against 4% in Q1. However, the government final consumption expenditure grew by 15.6% in Q2 as against 8.8% in Q1. Corporate indebtedness, risk aversion by banks, and the crisis in the non-banking financial companies have come in the way of investment demand. One of the reasons for deceleration in India is the credit conditions being tight, part of which is a supply-side problem, other than global reasons. In a prolonged period of demand slowdown, this would imply a long period of lower capacity utilisation, a delay in the investment cycle, and a decline in long-term potential growth.

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Updated On : 16th Dec, 2019

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