Do Current Economic Conditions Hint At Impending Crisis?

Do Current Economic Conditions Hint At Impending Crisis?

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Video Editor: Mohd Irshad Alam

There’s bad news on the economic front – GDP rate has slipped drastically to 5 percent and inflation rate has soared. Despite the bold steps taken by the government to revive the economy of late, the desired results haven’t been achieved owing to a rather complex situation.

A few economists discern clear signs of a slowdown while other think it’s the beginning of an economic contraction – begging the question – Is India on the brink of an economic crisis?

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Let's take a look at some numbers:

The projected GDP growth rate for the second quarter is 4.25 percent to 4.74 percent.

GDP projections by experts:

  • SBI’s Chief Economist Soumyakanti Ghosh – 4.2 percent
  • Nomura's Sonal Verma - 4.2 percent
  • ICRA’s Aditi Nair - 4.7 percent
  • Kotak Securities’ Shubhdeep Rakshit - 4.7 percent

The actual numbers will be released by the end of November. However, it’s safe to assume India’s GDP growth will languish at around 5 percent. SBI’s already revised its earlier projection of 6.8 percent to 5 percent.

There’s been much discussion over the government recapitalising banks. And so they have done but not at a desirable pace or scale. The sentiment is so bad that people actually took 6 percent fewer loans in the second quarter.

Also Read : Soaring Markets & Slowdown Caused by Lingering Confusion in Policy

Loans provided to NBFCs and housing finance companies have seen a sharp decline as well. The situation is a bizarre one – public sector banks, which are supposed to lend money to fuel growth, are allocating their funds to government securities.

RBI has reduced its lending rate by 135 basis points in 2019.

Despite this, neither the businessmen nor the consumers are lining up to apply for loans. People are hopeful the RBI will slash the lending rate in December which will fuel growth. However, the situation has deteriorated so much that the rate cut alone won’t make much difference.

Real inflation soared to 4.62 percent in October while food inflation is as high as 7.89 percent. 

Now, the RBI will have to decide on whether or not to raise the interest rate to fuel growth or keep it stable to control inflation. Industrial Output numbers are also dismal.

Industrial production experienced its greatest dip in the last eight years in 2019.

It contracted by 4.3 percent. The situation of all eight core structures is abysmal. Most sectors are grappling with negative growth.

Capital goods have also decreased. This implies that industrial investment is also not improving. The government has taken steps to remove liquidity crunch. They made massive cuts in corporate tax rate. Recently, they even rolled out a package to rescue the real estate sector. But the situation of the economy remains so complex and adverse that even with all these efforts, they are unable to reverse the slowdown.

Now that there is a slowdown in the market, the government will also face less tax collection. Hence, the calculations made during Union Budget will get affected.

How will the government control the fiscal deficit?

If they reduce expenses, it will affect growth. The market was happy after corporate tax was cut and cheered as Sensex soared. It has slowly dawned on people that a jump in the market has nothing to do with the slowdown.

India’s vision of being a USD 5 trillion economy will require an 8 percent growth rate.

Amid the noise made by Ease of Doing Business, a prominent thinktank in India – NCAER ie National Council of Applied Economic Research in its recent survey reported that between August and October, the Business Confidence Index dropped by 15.3 percent from what it was in July.

To truly understand what this index means, one should understand the crisis Vodafone is facing. Their CEO has said that if the government doesn’t give them 2 years’ time to pay the spectrum and licence fee then they will suspend business in India. This means the company will liquidate its assets. To make telecom companies pay their dues, Supreme Court has hinted at a formula which, if implemented, will force these companies to collectively pay Rs 90,000 crore. The telecom sector, which is already in crisis, will be completely destroyed.

Also Read : India World’s Most Open, Investment Friendly Economy: PM at BRICS

However, it’s important to note that a 1 percent dip in GDP is equivalent to 30 lakh people either getting or losing jobs.

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