Shinzo Abe in India: Citing Nehru, Japanese PM resolves to be ‘friend of India forever’

Understanding the slowdown

Indian economy is slowing down, GDP growth has lost momentum. With every passing quarter, the slowdown is explained away either as a transitory phenomenon or as happening for reasons beyond the government’s control: deficient rains, the sluggish world economy, or lately due to demonetization and the goods and services tax (GST).

Understanding the four engines of the economy:

  • Four engines powered the economy during the boom years: exports, government investments, private consumption, and private investments.
  • Of these, government investments and private consumption are still running
  • But private investments and exports have lost momentum and their numbers are not at all promising
  • The impact of these on growth has received inadequate policy attention and pain has spread to the rest of the economy

Reasons for slowdown in exports:

  • The global economic downturn that followed the 2008 financial crisis dealt a body blow to exports
  • Global recovery has lifted exports of most Asian countries but Indian exports have continued to stagnate, their competitiveness eroded by an overvalued rupee

Reasons for slowdown in private investments:

  • The share of investments in GDP has declined steadily and the decline in private investments are so sharp that it has offset the increase in government investments
  • The steps taken for restarting the private investments cycle, which include improving the ease of doing business and increasing foreign investments have proved insufficient
  • As a result new jobs are not getting created. Without new jobs private consumption will not grow beyond a point
  • Companies have put investments on hold as they are not convinced that new factories will be sufficiently profitable
  • Consumer price inflation is also a determinant of profitability, but the government being politically sensitive has set a lower target for consumer price inflation
  • The flow of credit in the economy has reduced because of the issue of bad bank loans
  • All these factors have created an environment where investment decisions are being postponed

Even though dark clouds loom over the economy, the situation is not irreversible. But the policy response so far has been feeble and misses urgency

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