Story Of The Week

India’s low tide of GDP Growth

“When learning is purposeful, creativity blossoms. When creativity blossoms, thinking emanates. When thinking emanates, knowledge is fully lit. When knowledge is lit, economy flourishes.”

– Dr. A.P.J. Abdul Kalam

Introduction

From the Financial Year 2015-16, the GDP growth of India has never gone below the 7% mark. Every citizen of India had a smile on their face, the reason is clear. India had scored more than China’s Constant GDP growth rate.

After that, for the first time, India has seen a drastic downfall in GDP growth rate in the last two-quarters of FY2017. Thanks to Demonetisation, the consequences of it, in many ways, changed the economy head over heels. Some called it a blessing in disguise.

The Economic Survey expected GDP growth to be between 6.75 and 7.50 per cent in 2017-18. On 31st August, the Central Statistics Office (CSO) released the Gross Domestic Product (GDP) figures for the first quarter (April-June) of the financial year 2017-18. According to it, India’s Q1 GDP growth fell to 5.7%.

The recently released data for the growth rate of Q1 for FY 2017-18 has wiped that smile off common man’s face. After seeing a high growth rate for last few years, India unexpectedly took a reverse gear and reached to 5.7% in this first quarter, the lowest in last 13 quarters.

The data shows a sharp 2.4% degrowth of eight core sectors of the economy in July, especially agriculture, manufacture, construction sectors took a beating. Also, the fiscal deficit levels for this quarter crossed 92% of budget estimate for FY18 at July-end.

While addressing the media, Finance Minister Arun Jaitley said, “GDP data throws up challenges for the economy”. It is high time and we have to look at the factors that took a toll on the growth of our GDP.

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Let’s analyze in detail a few major reasons behind this low tide:

Implementation of GST

The sector which has seen the most adverse effect on growth is the manufacturing sector. The manufacturing growth in terms of Gross Value Added (GVA) decreased to 1.2% from 10.7% in the corresponding quarter of last year. GVA in manufacturing is largely contributed by the private sector which performed poorly this quarter. This has been attributed to the roll out of GST, as this led to manufacturers aiming to get rid of their present stocks and refraining from getting most of the stocks they had.

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GST was implemented on 1st July 2017 in India as one tax one nation. Manufacturers all across India wanted to start off with a fresh slate, due to which they started massive destocking operations. The destocking operations were carried out by cutting down on production activities & giving discounts on various items. The destocking operations saw an increase in trading activities, as there was an increase in sales due to various discounts being offered to customers.

The low growth has many factors affecting it with particularly, the effect of low inventories & high input costs has caused the public sector investments & manufacturing sector to weigh down thereby creating the weakest link in the growth story of the country.

Demonetisation

8th November 16:  The day when the legendary step was taken.

The government of India declared the demonetization of the 500 and 1000 ₹ notes of the Mahatma Gandhi series. The current Prime Minister Narendra Modi warmly embraced the event, comparing it to ‘mahayagna’ that would cleanse the country of corruption and black money. People trusted the government in the change.

However, the former Prime Minister and Economist Dr. Manmohan SIngh disagreed. He termed the process to be an example of “monumental mismanagement” and thought that it would lead to tremendous suffering undergone by the common man.

There were a lot of people who suffered the wrath of demonetization. These people would have realized the value of having liquid cash in their hands. The common Indians stood in long queues, waiting for their turn to come and a glint of hope- END OF BLACK MONEY.

Recently, the RBI released the provisional figures: 99% of the demonetized notes returned!  An instant question was shot by the media- did demonetization really cover black money if nearly all the money returned to the system?

Seemed like Raghuram Rajan’s comment held true to some extent- at least some People did find a way around it.

To multiply the shocks,  slow growth rate of this quarter has also been attributed to Demonetisation. Demonetisation lead to a sharp reduction in demand that got coupled with the slowdown in the economy. The sectors weakened due to less cash have been hit badly by demonetization. These sectors include Manufacturing, Mining and Quarrying, and construction. As demonetization took away all the cash from these sectors, the growth of these cash intensive sectors suffered, contributing to the negative impact on the GDP.

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However, there were also some sectors that were positively impacted including hotels, transport, defense, trade, financial services, and communication.

Way forward for Indian Economy

India has flourished in the hardest of times and there is no dilemma in claiming that India will get past this difficult phase too. Mr. Arun Jaitley, Finance Minister of India has claimed that India will grow at 7% despite the recent decline in the GDP. The same has been predicted by World Bank in May this year.

The issues that led to the fall in the GDP, would affect the economy in the short run but in the long run, India’s economy would benefit from the introduction of the single tax, reduction in the supply chain cost, low inflation and increased consumption and one single market. The global market if remains stable would also cater in uplifting the GDP.

With a bag full of policies, reforms, and willingness, India is on the path where its knowledge is lit and the economy is waiting to flourish.

References

http://www.livemint.com/Industry/acEAx2TJIDMMzZbuhOBpLN/India-GDP-growth-slumps-to-57-in-Q1-hit-by-GST-implementa.html

http://indianexpress.com/article/india/distress-in-farms-gdp-data-confirms-deflation-is-here-4824695/

http://timesofindia.indiatimes.com/business/india-business/gdp-growth-at-3-year-low-of-5-7-in-apr-june-as-gst-demonetisation-bite/articleshow/60315709.cms

http://www.financialexpress.com/economy/gdp-growth-hits-3-year-low-of-5-7-pct-as-manufacturing-impacted-by-both-pre-gst-stock-clearance-and-consumption-vigour-wanes/835953/

 

 

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