\n\tIndia\u2019s real or inflation-adjusted gross domestic product (GDP) grew at\n 5 per cent in the June 2019 quarter of financial year 2019-20 (Q1FY20),\n the slowest growth in six years (25 quarters). In nominal terms, the \ngrowth stood at 7.99 per cent, lowest since December 2002.<\/p>\n\n\n\n
With this, fears of the slowdown being a more structural one than a cyclical one have surfaced.<\/p>\n\n\n\n
\n\tA cyclical slowdown is a period of lean economic activity that occurs \nat regular intervals. Such slowdowns last over the short-to-medium term,\n and are based on the changes in the business cycle.<\/p>\n\n\n\n
\n\tGenerally, interim fiscal and monetary measures, temporary \nrecapitalisation of credit markets, and need-based regulatory changes \nare required to revive the economy.<\/p>\n\n\n\n
\n\tWhat is a structural slowdown?<\/strong><\/p>\n\n\n\n A structural slowdown, on the other hand, is a more deep-rooted phenomenon that occurs due to a one-off shift from an existing paradigm. The changes, which last over a long-term, are driven by disruptive technologies, changing demographics, and\/or change in consumer behaviour.<\/p>\n\n\n\n \n\tDissecting India\u2019s slowdown<\/strong><\/p>\n\n\n\n \n\tA slowdown in consumption demand, decline in manufacturing, inability \nof the Insolvency and Bankruptcy Code (IBC) to resolve cases in a \ntime-bound manner, and rising global trade tension and its adverse \nimpact on exports are some of the factors affecting India\u2019s growth, \nanalysts say.<\/p>\n\n\n\n \n\tConsumption:<\/strong><\/p>\n\n\n\n \u201cPrivate consumption, which contributes nearly 55-60 per cent, to India\u2019s GDP has been slowing down. While the reduced income growth of households has reduced urban consumption, drought\/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption,\u201d said analysts at India Ratings and Research, Indian arm for Fitch Group. The private final consumption expenditure (PFCE) has slumped to 3.1 per cent in Q1FY20, the weakest level since Q3FY15.<\/p>\n\n\n\n A slowdown in the GDP growth for the fourth consecutive year, from 8.2 per cent in FY17 to around 6.5 per cent in FY20 (E), makes it a case of structural slowdown, they say.<\/p>\n\n\n\n \n\t\u201cThe increase in change in stock (in current prices) from Rs 34,485 \ncrore in Q1FY17 to Rs 47,805 in Q1FY20 also indicates inventory build-up\n and hence reflects consumption slowdown,\u201d Soumya Kanti Ghosh, chief \neconomist at State Bank of India, wrote in his weekly note, Ecowrap.<\/p>\n\n\n\n \n\tGhosh further attributes the slowdown in the consumption sector to change in the consumption pattern.<\/p>\n\n\n\n \n\t\u201cInclination towards Herbal and Ayurveda oriented personal care \nproducts, presently being made in the unorganised segments, which are \nnot formally captured by the data, could be one of the reasons for a \ndownward bias in the data,\u201d he wrote in his note.<\/p>\n\n\n\n \n\tSavings:<\/strong><\/p>\n\n\n\n \n\tSavings by household sector \u2013 which are used to extend loans for \ninvestment — have gone down from 35 per cent (FY12) to 17.2 per cent \n(FY18). Households, including MSMEs, make 23.6 per cent of the total \nsavings in the GDP.<\/p>\n\n\n\n \n\t\u201cSince households are the only net savers in the economy, their savings\n are major contributors towards investment. These savings have now \nreached to a level which isn\u2019t adequate to fund the government \nborrowings\u2026 This will keep interest rates elevated,\u201d says Sunil Kumar \nSinha, principal economist, India-Ra.<\/p>\n\n\n\n \n\tInvestment:<\/strong><\/p>\n\n\n\n \n\tGross Fixed Capital Formation (GFCF), a metric to gauge investment in \nthe economy, too has declined from 34.3 per cent in 2011 to 28.8 per \ncent in 2018, government data show. Similarly, in the private sector, it\n has declined from 26.9 per cent in 2011 to 21.4 per cent in 2018.<\/p>\n\n\n\n \n\tThe household sector, which is the biggest contributor to the total \ncapex in the economy, invests nearly 77 per cent in the real estate \nsector, which has lost steam since demonetization.<\/p>\n\n\n\n \n\tThe way out?<\/strong><\/p>\n\n\n\n \n\tAnalysts say under the current macro environment, monetary policy seems\n to be less effective than fiscal policy as \u2018improper transmission \nmechanism\u2019 fails to pass on benefits to the real economy.<\/p>\n\n\n\n \n\tThe Reserve Bank of India (RBI) highlighted a broad-based cyclical \ndownturn in several sectors, including manufacturing, trade, hotels, \ntransport, communication and broadcasting, construction, and \nagriculture, and called for counter-cyclical actions in terms of \nmonetary and fiscal policies, along with deep-seated reforms for the \nstructural slowdown.<\/p>\n\n\n\n \n\tFurther rate cuts, increase in fiscal spending, deviation from fiscal \ndeficit target, and boost in consumption sentiment are some of the \nsuggestions by analysts to arrest the downtrend. On its part, the RBI \nhas cut the repo rate by 110 basis points so far in CY19 to 5.4 per cent\n \u2013 its lowest level since 2010.<\/p>\n\n\n\n \n\t\u201cThere are structural issues in land, labour, agricultural marketing \nand the likes, which need to be addressed,\u201d the central bank said in its\n Annual Report for 2018-19.<\/p>\n\n\n\n Read More click here.<\/a><\/p>\n\n\n\n