The recently released report by Central Statistical Office, Government of India shows that GDP growth stood at 5% at the end of first quarter of 2019-20 which has been the lowest since quarter 4, 2012-13. There has been a gradual fall in the growth rate since Quarter 1 of 2018-19.

Source: Ministry of Statistics and Program implementation(MOSPI)

NITI Aayog Vice-Chairman Rajiv Kumar has termed the ongoing stress in financial stress as “unprecedented in the last 70 years” while calling for extraordinary steps to tackle the economic slowdown. Chief Economic Adviser K V Subramanian attributed this slowdown to both endogenous and exogenous factors. According to him global factors like deceleration in developed economies, Sino-American trade conflict etc., has an impact on the Indian economy. The government has focused to revive the economy and there has been host of measures taken by the Finance Ministry.

Before giving any medicine it is very important to understand what is the disease and what caused the disease, then only the antibiotics will work. Yes, the global economy definitely has an impact. But the slump in growth of Chinese economy has been much less severe if we compare the performance of first quarter, 2019-20 with that of the previous financial year.

Source: MOSPI Data, World Bank reports

This clearly indicates that while the global economy impact has been effecting, there has been a host of endogenous factor that has impacted the Indian economy severely since the first quarter of 2018-19. There has been a significant decline in the consumer demand. The growth rate of private consumption declined to 3.1 % as against 7.3%.

Source: MOSPI

There has been a significant drop in two wheeler and car sales. One of the possible reasons has been that there has been suspicion in the economy leading to lack of spending or lack of desire to spend from the more formal sector employees. But this lack in consumer demand is not restricted to luxury products alone. We also see a huge drop in sales of low ticket products like for example, a 5 rupee biscuit as well and further study clearly points out that this drop in FMCG demand is more rural India driven. All these drop in sales has lead to significant job loss in the economy.

 Now what is causing this lack in demand. The agriculture sector which had shown high growth in first quarter 2018-19. But since then there has been a significant drop in the growth of this sector.

Source: MOSPI

Agriculture sector employs the highest number of Indians. Almost 60% of Indians are dependent on this sector. So if the most people intensive sector shows a slow growth, this is bound to have an impact on the consumption demand.
After agriculture, the construction sector and the manufacturing sector are the most labour intensive sectors. There has been a severe impact of the slowdown in both the sectors. The construction sector grew at around 5.7% in comparison to 9.6% in the same quarter in the previous year.

Source: MOSPI

Similar is the situation in the manufacturing sector. This sector has a mere growth rate of 0.6% as against 12.1% in the previous year.

Source: MOSPI

The slowdown in these sectors is also manifested by a slowdown in the growth of MSME loans. There was almost a 25% growth in MSME loans in the range of 1 lac to 50 crore in 2017-18. But in 2018-19 this has dropped below 10% as per recent analysis by different agencies. Moreover the growth is less than 2% in the higher ticket size( 10 cr to 50 cr) segment.This clearly suggests a slump in the MSME sector.

So what we see is a decline in the growth of the people intensive sectors. This effects the economy significantly as this has a wide impact on the mass demand as the sectors where a vast majority of Indians are dependent are showing a slump. Added to this is the perception that the economy is doing bad. This has lead to holding back in spending mainly for the formal sector employees. Let us look into possible solutions to boost up demand in the economy.
A reduction in tax rate has been widely regarded as a means to increase consumption demand. But in Indian scenario this at best can have a impact on the formal sector employees who has a lack of desire to spend or are holding the spending and yes has some potential impact of increase in demand. So while tax cut is welcome, but is should be cut in indirect tax as that will impact more people. But is it a feasible solution? We have recently seen a huge transfer of RBI reserves worth Rs 1.76 lakh crore to the government of India. Given the need for such unprecedented money by the government, it is unlikely that a significant tax cut will be announced. As that will lead to a decline in tax revenue and will mean more funds will be required by the government.

Any means to pump in consumption demand not sustainable unless there are steps taken to boost the people intensive sectors like agriculture, construction and manufacturing. Unless the slump in the people intensive sectors stops, the problem of lack of demand will not be solved. More thought through steps to boost the people intensive sector is the need of the hour and the right medicine for the present problem.


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