The government of India published the GDP growth numbers of Q2, 2019-20. The GDP growth stood at 4.5%, the lowest growth in 6 years. This is for the second time in 6 years that the quarterly growth has been below 5%. Indian economy has been showing a declining trend from quite some time now. Also other economic indicators showed dismal picture only in the recent past. Given this situation economists predicted a slow growth in this quarter.
Many experts sites global slowdown as a primary reason for the recent trends in Indian economy. If we compare the growth rates of Indian economy with that of Chinese economy , it is seen that while both has witnessed a decline in growth rate, the decline for India has been sharper. Q2, growth for Chinese economy stood at 6% as against 4.5% for India. So what Indian economy is witnessing is some thing more than the global slowdown alone.
The story becomes more dismal if one compares the growth with respect to the previous quarter. The growth numbers for GDP stood at 0.4%. The same for Chinese economy stood at 1.5%. In terms of GVA, there is actually a negative growth in Q2,2019 if compared with the previous quarter. Even Q2, 2018-19, witnessed a negative growth for GVA compared to the previous quarter. It must be noted here that it is from Q2, 2018-19, the steady decline in GDP growth ( compared to same month, previous year) began.
When we look at the sector wise growth, it is seen that apart from public administration and mining, all the other sectors have witnessed a lower growth as compared to previous year. The major problem remains as all the people intensive sectors, viz., agriculture, construction and manufacturing shows no sign of revival. The manufacturing sector in fact witnesses a negative growth of 1%. The present government had initiated the Make in India project which was supposed to boost the manufacturing sector. But the recent numbers reveal that more focus in needed in that sector.
The monthly growth numbers for the 8 core sector for the month of October also was released yesterday. The 8 core sectors as whole witnessed a growth of -5.8%. Apart for fertilizer sector, all the other sector witnessed a decline in the month of October.
What are the major drivers of this slowdown. If one looks at the expenditure data, it is clear that there is a decline in demand leading to a reduction in the growth of private consumption. The people intensive sectors are not showing signs of revival. Manufacturing in fact is witnessing a negative growth. So there is no sustainable push to revive demand, mainly in the rural sector. The private consumption grew by 5.1% as against 9.8% in the previous year. To add on to the slow growth in domestic demand, there has been a negative growth in exports in Q2, 2019. Moreover investments also show a huge decline in growth. The gross capital formation grew at a dismal 1% as compared to almost 12% growth in previous year.
As is expected, during any economic slowdown, there is a surge in government expenditure following the Keyenesian economics. It is because of the surge in government expenditure and also the growth in public administration because of that, this 4.5% growth is achieved. If one takes out the public administration numbers, the growth rate of GVA goes down to 3.2%.
With half of the year passed, the half yearly growth for GDP stood at 4.8% as against 7.5% in the previous year. The government has taken host of steps to boost of the economy. The impact of those are not very visible in the immediate run. How will those impact in the long run remains to be seen. The major problem faced by the economy today is lack of demand, both domestic and international. Unless demand situation improves, new investments will not come.
One of the measures taken by the government is the reduction in corporate taxes. It is argued that this will lead to more investments from the corporate. But in a environment of reducing demand both domestic as well as exports, how much profitable investments the corporate will be able to make remains a challenge. Moreover, even if there is a surge in investment, the impact of it will not solve the immediate problem. Yes it will improve the balance sheets of the corporate and lead to some additional revenues for the share holders in the short run. Another measure taken by the government is to provide funds to complete the unfinished projects in the real estate sector. Yes, that will lead to some work for the construction workers and will have some boost up in the demand. But real estate itself is facing a huge dearth of demand and in that scenario increasing the supply will mean further problems in future.
The lack of growth of investment is driven by lack of demand only. So the focus of the government should be to boost up demand. Since international demand generation is out of the purview, the focus should be to boost domestic demand. For that more money needs to be put in the hands of the public. Every section of economy is facing lower demand. For the poorer section PM Kisan schemes should be extended beyond certain section of farmers. Jan Dhan accounts should be used for this purpose. The minimum wage for MGNREGA needs to be increased and more funds needs to be allocated to that. For the middle class, what is required is a reduction in the GST rates at least for 6 months. This will impact the poorer section also. Moreover some rationalisation of direct tax rates in terms of some immediate rebates may be of huge help. People will fill they have more money in hand and hence there will be a surge in demand. For the corporates , the reduction in corporate tax is already a huge boost. What is required is a surge in demand in the market, so that the corporates gets more confidence to make new investments.