Topic : Is the current economic slowdown cyclical or structural?
Topic in Syllabus: General Studies Paper 3: Indian Economy
The Indian economy is passing through a phase of economic slowdown, with the GDP growth registering one of the lowest rates of 5.8 per cent in the last quarter of FY19.
Current scenario of Indian economy
- India is undergoing an economic slowdown. Its GDP grew at 5% in the first quarter of FY20, marking the slowest growth since the fourth quarter of FY13.
- In its annual report for 2018-19 released on 29th August, the Reserve Bank of India (RBI) had said that the slowdown was cyclical, rather than structural, which would have required deeper reforms.
- However, some experts believe that the current slowdown is more than a cyclical one and of the structural type which is evident from the fact that the successive rate cuts by the Central Bank have not yielded the desired results.
What is cyclical slowdown?
- A cyclical slowdown is a period of lean economic activity that occurs at regular intervals. Such slowdowns last over the short-to-medium term, and are based on the changes in the business cycle.
- Ways to recover from cyclical slowdown:
- Generally, interim fiscal and monetary measures, temporary recapitalisation of credit markets, and need-based regulatory changes are required to revive the economy.
What is a structural slowdown?
- A structural slowdown, on the other hand, is a more deep-rooted phenomenon that occurs due to a one-off shift from an existing paradigm.
- The changes, which last over a long-term, are driven by disruptive technologies, changing demographics, and/or change in consumer behaviour.
- In such a scenario, a monetary and fiscal stimulus won’t be enough to revive the economy.
- Fixing such problems would require the government to undertake some structural policies. The best example in this regard would be the reforms that were carried out to address the crisis in 1991.
Factors Affecting India’s Growth
A slowdown in consumption demand, decline in manufacturing, inability of the Insolvency and Bankruptcy Code (IBC) to resolve cases in a time-bound manner, and rising global trade tension and its adverse impact on exports are some of the factors affecting India’s growth
- Private consumption, which contributes nearly 55-60% to India’s GDP, has been slowing down.
- While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.
- Savings by household sector – which are used to extend loans for investment — have gone down from 35% (FY12) to 17.2% (FY18).
- Households, including MSMEs, make 23.6% of the total savings in the GDP.
- Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy, too has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data show. Similarly, in the private sector, it has declined from 26.9% in 2011 to 21.4% in 2018.
- NBFC crisis triggered by IL&FS default led to a liquidity crunch in the economy.
- RBI’s Annual report highlighted that there are still structural issues in land, labour, agricultural marketing and the like that need to be addressed.
- The household sector, which is the biggest contributor to the total capex in the economy, invests nearly 77 per cent in the real estate sector, which has lost steam since demonetization.
- Subsequent rate cuts by RBI to lower the interest rate.The RBI has cut the repo rate by 110 basis points so far in 2019 to 5.4% – its lowest level since 2010.
- Stimulus package announced by the government along with other measures may propel demand and thus help to recover the economy.
- Surplus transfer by the RBI to the government can help boost planned-spending of the government without compromising fiscal deficit targets. It would also help in
Recapitalising Public sector Banks to tackle the NPA crisis.
- Merger of Public sector Banks would enhance the credit culture and thus spur investment in the economy.
- Under the current macro environment, monetary policy seems to be less effective than fiscal policy as ‘improper transmission mechanism’ fails to pass on benefits to the real economy. Hence steps should be taken in this regard.
- The Reserve Bank of India (RBI) highlighted a broad-based cyclical downturn in several sectors, including manufacturing, trade, hotels, transport, communication and broadcasting, construction, and agriculture, and called for counter-cyclical actions in terms of monetary and fiscal policies, along with deep-seated reforms for the structural slowdown.
- Rate cuts, increase in fiscal spending, deviation from fiscal deficit target, and boost in consumption sentiment are some of the suggestions to arrest the downtrend.
- On its part, the RBI has cut the repo rate by 110 basis points so far in CY19 to 5.4 per cent – its lowest level since 2010.
- There are structural issues in land, labour, agricultural marketing and the likes, which need to be addressed.
Comment whether the present economic slowdown being faced by Indian Economy is Cyclical or structural. Critically examine the measures taken by the government to recover from the slowdown.