The Indian economy seems to be struggling for last few quarters. Not long back was Indian economy hailed as the fastest growing large economy even surpassing China’s growth rate. This bright picture faded away in last year or so. What is the factual position and what are the reasons for this slide?
Though ‘De-monetization’ is supposed to have long term benefits like digitization, curtailment of black money, bringing the parallel cash economy into mainstream economy etc., it certainly eroded the cash and liquidity in the market for the time being. Many cash businesses (which are not illegal per say) suffered a heavy jolt. Many jobs in the unorganized sector were lost. This seriously affected the purchasing power of the common consumer. Many also blame faulty or hasty implementation of GST but I would argue that even though it has increased the paperwork for small businesses and MSME sector, it has no (or very little) impact of demand generation. Here we have to understand that the main cause of worry for Indian economy is falling demand. In past few years, we have seen many financial scams surfacing and banks as well as financial institutions are now really worried about their NPAs. Obviously fresh lending is under tremendous scrutiny. This situation has also affected corporations and the liquidity in the market.
The international situation has also changed in last year or so. The crude oil prices have climbed up a little which has put additional burden on Indian foreign currency reserves. Further geo-political situation has also turned fluid. The tension between the US and North Korea has affected the whole world and has impacted the international trade to some extent. Even the hostile intentions and actions by India’s neighbors have added to the uncertain environment. Many countries, in order to protect the domestic industry, have started imposing various import barriers which has further reduced the export opportunities for India.
All the above factors have contributed to the slowing down of the Indian economy and its world ranking slipped to 7th position. The unemployment figures are scary. Domestic demand is not picking up. Export opportunities are shrinking. The auto sector performance is deepening and has created a huge negative sentiment in the country. Recently, FM has come out with some relief package for this industry and also with some additional liquidity for the banks. Now it is to be seen how the auto industry and the consumer reacts to these measures. For the steel sector, only 12 % of steel goes directly or indirectly to auto and its major customer remains infrastructure and construction. Unless there is a rise in steel demand in these sectors, steel mills will continue to bleed. Further, given the fact that around 70 % of India’s population depends on agriculture, unless something is done to improve the profitability of primary agriculture and even agro based and allied industries, the general demand will not get a forward push. Let’s hope this happens and happens soon!