• India’s GDP growth rate has came down to 5 per cent in first quarter of 2019- 20, from 8.1 per cent in fourth quarter of 2017-18.


  • Is this downturn cyclical or structural?
  • Cyclical
    • Any downturn that happens because of a weakening of demand is cyclical.
  • Structural
    • If there are fundamental weaknesses in the structure of the economy, these need to be removed to sustain high growth.

Earlier Incidents of Structural Downturn:

  • Successful implementation of the structural reforms in 1991 pushed India’s potential growth rate to a high level.
  • We have successfully tackled structural slowdown in 1991 with high growth rate and structural reforms.

Current Situation:

  • What Indian economy is witnessing is a combination of the two.
  • Several sectors such as automobiles and housing are facing a sharp weakening of demand.
  • There has been a significant fall in the savings and investment rate.
  • Within household savings, the proportion of savings in financial assets has sharply declined.
  • Apart from these, a significant growth-stifling factor is the weakness of the banking and non-bank finance sectors due to both cyclical and structural reasons.
  • The saving rate has fallen from 34.6 per cent in 2011-12 to 30.5 per cent in 2017-18.
  • The investment rate, which is dependent on the savings rate supplemented by net capital inflows, has also fallen from 39 per cent of GDP in 2011-12 to 32.3 per cent in 2017-18.
  • This persistent downward trend of the saving and investment rates has led to a fall in India’s potential growth rate to below 7 per cent.
  • Any additional fall below the potential growth rate may be due to cyclical factors.

Government and RBI Response:

  • The central government and the RBI have responded with a number of policy initiatives.


  • The central government has undertaken a number of steps post the 2019-20 budget which include —
    • Withdrawal of enhanced surcharge on foreign portfolio investors,
    • A public sector bank consolidation plan,
    • Additional depreciation rates for vehicle manufacturers,
    • Additional credit support for housing finance companies and
    • Recapitalisation of public sector banks

2.Monetary authority

  • The RBI has reduced the repo rate by 110 basis points since February 2019, reducing it from 6.5 per cent to 5.4 per cent.
  • Issues with Monetary policy.
    • The monetary authorities have reduced the policy rate but banks have not followed suit due to structural problems against the background of rising non-performing assets.
    • The central banking system is equipped with efficient brakes but the accelerator is uncertain.
    • While the RBI can play a supportive role in expanding liquidity, we must understand the basic limitations.
    • Banks must also be careful while expanding credit. Inappropriate lending can land them in trouble later. Recapitalisation of public sector banks does not “infuse” fresh funds.
    • The mechanism adopted only enlarges their freedom for lending.
    • The bank consolidation plan could have been introduced at a more favourable time.

 Better ways to tackle the Situation:

  • In the present context of a declining investment rate and declining demand, a good solution will be to enhance government expenditure, especially capital expenditure.
  • On the scope for increased spending, the bonanza from the RBI will go only to meet the shortfall in revenues.
  • A larger disinvestment may help.

What is Capital Expenditure:

  • The Union government defines capital expenditure as the money spent on the acquisition of assets like land, buildings, machinery, equipment, as well as investment in shares.

Other Fiscal-Structural impacts on Economy:

  • GST
    • GST has changed the structure of indirect taxes, affecting the balance between goods and services, formal and informal sectors, and central and state tax revenues compared to the pre-GST period.
    • Since its implementation, the compliance cost has risen considerably for the assesses, particularly the small and medium enterprises.
    • The buoyancy of centre’s indirect taxes in the post-GST period has been at low levels — 0.5 in 2017-18, 0.2 in 2018-19 and is budgeted to be 0.6 in 2019-20.
  • New Monetary Framework
    • The decline in price level in recent years partly because of the new monetary policy framework has affected the nominal GDP growth rate and growth rate of tax revenues.
    • The implicit price deflator has fallen more than 3 percentage points compared to the average of 2012-13 to 2013-14 and 2017-18 to 2018-19.
    • The growth in central tax revenues fell by 3.5 percentage points and that in the states’ own tax revenues by 4.7 percentage points during the same periods.
    • These changes have left limited space for augmenting capital expenditure.
    • The Centre’s capital expenditure is currently languishing at 1.6 per cent of GDP.

What are the Options Ahead?

  • Counter-cyclical policy is primarily the responsibility of the Centre.
  • Given the revenue trends, it may not be in a position to increase its capital expenditure relative to GDP.
  • Other available options include bringing on board state governments for increasing their capital expenditure relative to their respective gross state domestic products (GSDPs).
  • Second, the Centre may invest through central public sector enterprises (CPSEs) an additional one percentage point of GDP compared to the present levels.
  • Further, through the public-private partnership (PPP) mode, the private sector may be induced to supplement the government’s investment in select projects.
  • The Amended FRBM Act has a provision for increasing the fiscal deficit by 0.5 per cent of GDP under certain circumstances. The government can make use of this provision.
  • Issue with Export
    • The present slowdown is happening at a time when industrialised countries are themselves passing through a recession.
    • Boosting export demand in this context becomes difficult.
    • Despite the recessionary conditions in the industrialised countries, it may still be possible to pitch for a higher growth in exports.
    • Allowing the rupee to depreciate steadily may help exporters.

Way Forward:

  • One redeeming feature of the current situation is that despite floods, agricultural production may pick-up leading to a possible pick-up in Rural Demand.
  • The government should also address sector-specific problems and these need not be fiscal in nature.
  • A cautious expansion in banking credit can also help.
  • It is also the time to look at structural reforms in the banking sector, governance in general and fiscal reforms relating to direct taxes and GST.

Source: Indian Express



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