Daily Current Affairs 30 Dec 2019

Economic growth GDP growth economic slowdown reason

The economy will improve only by the increase in demand-

India’s GDP growth rate just fell to 4.5 percent in the last quarter, the lowest in the last 26 quarters.  Earlier, the growth rate was recorded at 4.3 percent in the fourth quarter of 2012-13.  An economy that was growing at the fastest rate among the world’s major economies is a matter of concern.  There will also be suggestions if there are a problem and policymakers will try to solve the problems, but if the problem is diagnosed properly and appropriate remedial measures are taken, then we will be able to resolve it soon.  If there is a mistake in the diagnosis itself, then the solution will also be wrong dissatisfying. This has been proven true in the slowing down of the Indian economy.  Policy-makers, as well as ‘experts’, can slip into solutions if they make a mistake in diagnosis.

We have to understand that this slowness is not due to the supply side but to the demand side.  In fact, due to the decrease in demand in the economy, production is slowing down, while the economy remains capable of producing more.  India has a long history of high inflation, due to which the poor have to face great difficulties. Because of this, the money which could have been used for productive work, that is being used for hoarding and black marketing, which led to the misuse of resources.  Under the Financial Liability and Budgetary Management (FRBM) Act, passed for more than a decade, the government had imposed a cap on its fiscal deficit. It is being implemented gradually.  Inflation has come down considerably due to limited fiscal deficits as well as reduced liquidity in the country through measures like demonetization.  It has to be understood here that only a small amount of inflation encourages production and investment.  In rate reduces the incentive for investment, which led to reduced demand as well as reduced our rate of gross fixed capital formation.

In the first decade of this century, the demand for houses had become the engine of growth, because the increase in housing has a positive effect on many other industries.  Due to the excessive construction of houses, the number of unsold houses has increased and the area was adversely affected.  Despite a 30 to 50 percent reduction in house prices, buyers were not enthusiastic about buying a home,  rather the expectations of more fall in price have further exacerbated the housing crisis.  Meanwhile, higher interest rates have also reduced the prospects for increased investment in housing, industrial and infrastructure.  Recently, there was a slowdown in automobile demand, even the huge discounts offered by the companies could not excite the buyers.  It may be said that the current slowness is due to a decrease in demand, but not due to supply constraints.

Wrong diagnosis – wrong treatment: –

The sluggishness of demand is more related to the purchasing power of the people.  We understand that income increases with growth in GDP and hence people can demand more goods and services.  However, for some other reasons, this relationship between rising GDP and demand for goods and services has deteriorated.  The reason is that rising GDP has failed in the usual increase in the income of the general public.  Income and wealth are concentrated in a few hands, so demand is not increasing in proportion to rising GDP. A reduction in demand is called a Recession. The slowdown in demand discourages to produce more and invest more.

Moreover, despite the very low rate of inflation, the Reserve Bank of India’s stance of not lowering the interest rate under Dr. Raghuram Rajan also became a major reason for slowing demand.  The high-interest rates acted like fuel the sluggish demand.

 What is the correct diagnosis: –

We have to take all measures which can help to increase the demand.  Keeping more income in the hands of common people is the long-term solution to this situation.  Some people suggest that we can increase the demand by reducing tax on the rich and middle class, but this will be illogical as the decrease in the revenue of the government may increase the danger.  Today, revenue is already in trouble due to the low collection of GST and direct taxes.  On the other hand, due to the exemption of corporate taxes, revenue is also in trouble.  We are seeing that tax is not being charged even from e-commerce companies and technological and social media companies.

There is no doubt that the government is under great pressure due to frail figures of GDP, unemployment, etc.  But under the guise of slowness in such circumstances, the agenda of globalization is being extended through wrong suggestions by its proponents.  We have to understand that most of these suggestions are related to the supply side, while the problem is from the demand side.  The latest suggestions in this series are from former RBI Governor Raghuram Rajan.  First of all, they suggest land acquisition and labor reforms.  They advocate availing agricultural land for non-agricultural purposes.  His suggestion cannot be called right because no project has stalled today due to the non-availability of land.  At the same time, he advocates for labor reforms, ie ‘Hire and Fire’, which means that the company should hire and remove workers anytime.  Due to these so-called labor reforms, the work has not stopped.  They also suggest reforms in the electricity and telecommunications sector. Among all these suggestions, there is no suggestion that is meaningful in the context of slowing down of the current demand.  In a  close view, all these suggestions are related to the ‘Washington consensus’ mantra of globalization.  Economists advocating globalization continue to make suggestions to deepen globalization, taking advantage of any crisis.  These suggestions are also in the same direction.  We have to understand that we are facing increasing inequality and unemployment today due to the policies of privatization and globalization.  In spite of GDP growth due to the decentralization of income and wealth, and jobless growth, demand is being constrained, as the purchasing power of the poor could not be increased.

It is true that being a developing economy, the supply side in our country presents a major obstacle to development.  Therefore, all efforts of economic policies were to increase supply and remove bottlenecks in infrastructure (electricity, rail, and roads, finance, marketing, etc.)

Today, the slowness in the economy is more due to demand-related factors.  A permanent solution to the current problem can be achieved only when the purchasing power of the common man increases and demand increases from it.

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Indian Economy Slowdown

Let the slowness be removed from the Economy.

Recently, on the 24th of  December, the International Monetary Fund (IMF) said in its report that the Indian economy is in a state of lethargy, the government needs to take immediate tactical steps.  The report said that the growth rate in the year 2019 was weak.  Employment opportunities did not increase during this period.  In such a situation, the IMF has suggested to India that bold and immediate fruitful steps are needed to get out of the economic slowdown. Certainly, if we look at the past duration of the year 2019, we find that from the beginning of January 2019,  the country is in the scenario of economic sluggishness; every month it was found that even after the efforts of the government to stop the economic slowdown, the economic sluggishness has increased.  This is the reason that the economic troubles of the country have increased as the economic slowdown increased in the year 2019 and in December 2019 it was found that the growth rate of the country reached a low level of 5 percent in the year 2019.  Significantly, the year 2019 has been a year of economic challenges for the Indian economy.  In the year 2019, every sector of the country’s economy appeared facing a shortage of demand.  There were lingering conditions in the real estate sector, manufacturing sector, and the automobile sector.  The Indian economy appeared to be in crisis due to declining exports, a fall in consumption,  investment as well as a decline in production and service sectors of the economy.

It is noteworthy that in the year 2019-20, various studies related to the growth rate, analysis of the country’s growth rate and economic crisis were presented.  Eminent rating agency Moody’s has said that the government’s fiscal deficit to GDP ratio can reach the level of 3.7 percent, higher than the fixed target of 3.3 percent.  Although the economic downturn in the year 2019 remained difficult, in the last year some strong economic achievements have also been achieved by India.  Especially in the year 2019, inflation was controlled.  On December 24, 2019, India’s foreign exchange fund reached a record level of $ 455 billion, amidst a slow economic slowdown.  Foreign direct investment (FDI) also increased in the year 2019 as compared to the year 2018.  Foreign portfolio investment (FPI) also grew rapidly in the year 2019.  Foreign portfolio investors invested around Rs 1.31 lakh crore in the Indian capital market in the year 2019.  In the midst of an economic slowdown in December 2019, the Sensex of the Mumbai stock market appeared at a record high of over 41500 points.  According to the United Nations report 2019, the Indian diaspora was first in terms of sending the remittances from abroad.  Migrants sent $ 79 billion to India in 2019.  But there is no doubt that in the year 2019, the phase of economic sluggishness which was inherited from the year 2018, increased month a month further and this had an adverse effect on India’s economy.  In the year 2019, due to some loopholes in  GST, the difficulties of the Indian economy have increased.  GST tax collection remained sluggish during the first year due to GST related shortfalls.

The complexity of the return arrangement and technical disruption led to huge shortcomings in bill matching, auto-generation of refunds and GST tax compliance regime.  Problems related to direct taxes also had an impact on the economy.  In such a situation, the government took several steps one after another in the year 2019 to remove the sluggishness of the nation’s economy.  On the 26th of August, for the first time in its past 84 years, it was decided by the Reserve Bank of India to transfer 1.76 lakh crore rupees to the Central Government from the reserve of dividends and surplus funds.  The Reserve Bank has a surplus fund of Rs 9.6 lakh crore.  Then, on September 14, the  Finance Minister, Nirmala Sitharaman made several important announcements to accelerate the export sector.  A fund of Rs 50 thousand crores was created to increase exports.  On the 20th of  September, the Finance Minister, Sitharaman reduced the corporate tax from 30 percent to 22 percent to stop the growing economic crisis.  Taking a major step of disinvestment in the wake of the fiscal deficit challenge, the government announced disinvestment of five large public sector undertakings to target disinvestment targets of Rs 1.05 lakh crore under the budget for the year 2019-20.  To be fulfilled certainly, the government will have to move ahead with a strategy to take export opportunities in the coming year 2020 amid the slowdown.  The government will have to implement all four labor codes in the year 2020.  The government will have to take effective and drastic steps to promote employment in the year 2020 by taking control of the manufacturing sector, banking sector, corporate sector, e-commerce, rural development, land, and black money.  It is important that the balance sheets of banks are should be cleaned and the operations of public sector banks should be improved.  In addition, monitoring of NBFCs should be improved.

The government has invested a lot of capital in state-run banks, but in case of operational reforms, the government will have to take several steps besides strengthening.  It is important that the recommendations of the Review Committee on  Fiscal Accountability and Budget Management Act are taken care of.  The government will have to focus on improving the excise, labor and land markets.  Broadly solving the problems of GST will not only improve revenue but also improve business ease.  The role of trade liberalization will have to become important in increasing growth and employment.  Only after this, in the year 2020, the ill effects of the economic slowdown will be avoided and the country will be able to move forward on the path of development.

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