An Economic Slowdown in India

As of late, there is much talk about an economic slowdown in India, a term often confused with a recession. This conversation is a product of India’s new rate of economic growth which fell from an expected 6.9% by the RBI in FY2019-20 to 6.1%. These rates compare unfavourably with the rapid increase in FY2015-16 of 7.5% to 8.2% in FY17-18 in the initial years of new political dispensation. New Government of India post 204-15 started multiple structural reforms like bringing in Insolvency & Bankruptcy Code (IBC), GST, the Real Estate Regulation & Development Act (RERA) and Demonetization. These reforms were put in place to formalise the informal sector of the economy. When it comes to the GST, many producers are convinced that the tax reform is cheating them of profits and is also the primary culprit for the Indian economic slowdown. While this is true in part, it should also be noted that similar slowdowns have been seen in every nation that has implemented the GST system. This phenomenon is a result of consumers and industries taking time to adjust to the new tax regime. Furthermore, the automotive industry, which employs over 35 million people directly, is also facing a slowdown. This industry is responsible for 25% of Indian manufacturing. The automotive industry has seen a 40% fall in sales as of July 2019. This decrease is a result of the spending habits of young India as well as new regulations placed in the industry. Millennials are opting out of purchasing cars because of easy-to-use taxi services, i.e. UBER and OLA and the overall increased ease of transport that has been brought about as a result. This development has pressurised the industry as it discourages demand. Moreover, due to new regulations passed, which dictate that trucks are now allowed to carry a 20-25% higher payload, resulting in fewer commercial vehicles demanded. While this would work to increase supply and reduce production costs in related industries by lowering barriers to transportation, it would decrease the demand for large commercial vehicles. This act has further put pressure on the auto industry. Additionally, the government passed a regulation that all vehicles would have to meet Bharat Stage emission standards (BS6 standards) by March 2020. This regulation would work to monitor CO2 emissions by commercial and privately owned vehicles. Due to this, consumers are delaying the purchase of automobiles until the necessary technology becomes available in the market. This delay has resulted in a loss of demand which has added to the national economic slowdown. Jobs are being lost, which further leads to a decrease in consumption and overall economic activity within the country. The IBC has led banks to declare their non-performing assets – loans that are in default – resulting in a hampering of their ability to lend. This regulation has resulted in decreased borrowing of startup capital for manufacturing as well as personal loans for purchasing commodities, thereby reducing economic activity. Another factor that has worked towards creating an economic slowdown in India is a ‘synchronised slowdown’ in international economies. This slowdown is a result of various trade conflicts in the world, which could lead to a loss of $700 billion in global GDP output by 2020, according to the IMF. In India, this would mean a loss of export revenue and a decrease in capital imports for manufacturing. With these happenings in mind, the government is working to reduce the impacts of an economic slowdown and push for economic growth in the country in the following ways; The government has cut down direct tax rates for Indian companies to 25% inclusive of Cess across the board and 17% for new companies starting manufacturing in the country until 2023. The 17% rate is comparable to peer group countries in the ASEAN region & China, and the government expects that this should help increase FDI in India. An increase in FDI in the country would work to increase production, employment and demand in the nation, which would all culminate to an overall increase in economic activity. Furthermore, measures have been taken to improve liquidity in the market, which would help make finance available to consumers and producers. These actions would generate demand in the economy and is a measure which comes after an 88% fall in the fund flow from banks and non-bank into the commercial sector. Additionally Reserve Bank of India is aggressively cutting the interest rate to reduce the cost of borrowing, thereby creating demand. To generate more demand in the economy, the government is considering reducing income tax rates, ensuring that consumers have a higher purchasing power and thereby greater demand. The solutions proposed by the government all work to reduce the impact of the economic slowdown in the medium to long run with little focus on the short run. This way of thinking could harm the population, which is facing an increasing rate of unemployment and cannot necessarily wait for the long term. Keeping in mind India's large youth population, the government should ideally be focused on job creation to reverse the effects of the economic slowdown.