India’s Gross Domestic Pain

In the recent report on Quarter 3–2019, India’s GDP growth rate plunged to a 26 quarter low in the July-September quarter at 4.5%. GDP was growing at 8% in the Q1–2018 but then went to 7%, 6.6% and 5.8% in the remaining three quarters of the fiscal year. In Q1–2019 we had 5% and now 4.5% in Q2 which is ridiculous to a developing country like India. In this article, we try to understand the problems from the grass root levels and finally we’ll look into the policies by the NDA government.

The Problem:

To get a sense of the whole problem, let’s try to understand what Gross Domestic Product is. It is the total worth of all goods and services produced within a country. GDP is calculated by the formula :

GDP = Consumption + Government spending + Investment + Net exports

For a developing country like India, the aspirations of the population to have a better life are very high. In classical economics, when resources meet aspirations the consumption (57% of GDP in the case of India) increases thereby by an increase in GDP. But looking at the numbers of GDP, no doubt this is a situation of danger.

Now GDP can also be written as the summation of contributions from different sectors. The breakup of GDP 18–19 is given below

Percentage Contribution to GDP

Auto and Infrastructure are two sectors which were heavily affected in the recent past. Let’s look at the causes and effects sector-wise.

Auto Industry :

Auto sector constitutes almost 50 % of the Manufacturing sector and is one of the biggest employment providers. Auto sector’s contribution to GDP has reduced to 7.2% this year as compared to 7.5% last year. Around 1 lakh temporary workers have lost their jobs during the last year.

The main factors affecting the auto industry is the BS-VI norms, GST rates and transition to Electrical Vehicles. People are having apprehensions that BS-IV vehicles might be banned once the BS-VI vehicles are introduced next April. Thus, the industry’s revival is not expected before 2021. The industry is demanding a uniform 18% GST for auto components to meet the production costs.

The passenger vehicle sales goal of 5 million units by 2020 looks bleak as the expected number is around 3 million units. But this is challenging as the implementation of the BS-VI norm will increase cost and cut down production.

Infrastructure:

Infrastructure almost contributes to 8–9% of the total GDP. Eight core infrastructure industries have shrunk to 5.8% in October. Six of the eight core industries saw a contraction in output in October.

Coal was the worst hit, declining steeply by 17.6%, crude oil by 5.1%, and natural gas by 5.7%. Production of cement (- 7.7%), steel (- 1.6%), and electricity (- 12.4%) also declined during the month. Growth in output of refinery products slowed down to 0.4% in October compared to 1.3% in the same period last year.

The only sector which showed positive growth was Fertilizers, where production increased 11.8% Y-o-Y.

Construction sector GVA declined to 3.3% in Q2 as compared to 8.5% last year. Government is aiming to increase infrastructure projects, introducing land acquisition reforms, clearance of past loans to speed up the construction growth.

Other factors :

1. The fiscal deficit for the period of April-October was recorded at 102.4% which has crossed the target mark for this year. Economists want the government to ramp up the capital expenditure to boost the economy but this might not be possible due to the breach of the fiscal deficit target in the April-October period.
2. The slowdown in private consumption, investment and export have affected greatly to economic growth. There is less demand for durable and non-durable goods. There is a lack of money in the market to produce goods. There is some relief in the form of private consumption growth rate, which grew by 5% as compared to 3% in the last quarter. However, this number is still far away from the 9.8% growth rate for last year.
3. The contribution of investments in the economy has shown a consistent decline over the years. Investment growth is just 1% as compared to 12% last year. Waving off foreign investments tax and corporate tax cuts are expected to increase investments.
4. The informal sector has also been heavily affected by the deepening slowdown. Labour markets have suffered the consequences. Unemployment rate touched a three-year high of 8.45% in October.

Government Measures :

1. The government is advising the banks to offer incentives and discounts to increase lending. RBI has cut the repo rate fifth time this year, by 25 base pts. The repo rate or the rate at which RBI lends to banks has been revised to 5.15 per cent from 5.40 per cent. The reverse repo rate has been adjusted to 4.90 per cent. It aims to boost demand and private consumption. RBI is also looking out to adjust the consumer inflation which stands at 4.62%.
2. Government has withdrawn taxes imposed on foreign investors. Start-ups have been exempted from ‘Angel tax’.
3. The government has planned Rs 70,000 capital infusion into public sector banks to improve their balance sheet growth.
4. The finance minister has proposed to slash corporate tax for domestic companies and new local manufacturing companies. The effective corporate tax now is 25.17% inclusive of all cess and surcharges for domestic companies.

With these measures, the government is hoping for some positive numbers in the third quarter. We will get a deeper picture of the actual extent of the slowdown in the third quarter.

Written by Ronit Raj

Edited by Mohit Doddi