Sept 06 2019

The Receding Indian Economy

Yes Indian Economy is not doing well. The declared corporate results have been unusually poor. The third quarter (Q3) profit results for the current year shows a pattern of slowdown experienced in other countries currently, marked by falling margins.

The major contributors to the cause of receding Indian economy are demonetisation, implementation of GST, monetary policy of the govt., stressed non-banking financial companies, banking sector, and problems in Agriculture sector.

  1. Demonetisation that was announced in the night of 8th November, 2016, withdrawn a major portion of the currency in circulation but failed in its expectation of ceasing the black money and counterfeit currency and rather drastically lowered the consumption leading to unemployment and lower income which again decreased the demand for goods and services that had hit GDP hard.
  2. Furthermore in July 2017 when GST (Goods and Services Tax) was rolled out with a noble intention to widen the tax net, decrease tax evasion and reduce red tape in the tax collection. It simplified the indirect taxation mechanism on the supply of goods and services and brought under one umbrella of "One Nation One Tax". The export growth was again hit hard due to delays in input tax refund to exporters resulting in increased working capital requirement.
  3. The financial crises of IL&FS (Infrastructure Leasing & Finance Services) in which various corporate, as well as mutual funds and insurance firms, had invested through short-term instruments has been defaulting on its several debt-obligation created a imminent crisis in the NBFC (Non Banking Financial Companies'). In other words, the NBFC don't have the funds to lend or are facing enormous difficulties in raising funds. NBFCs typically borrow money from banks or sell commercial papers to mutual funds to raise money. They lend these money to small and medium enterprises, retail customers and so on. Now, when NBFCs don't have money to lend, it reduced the credit flow in the Indian economy. This has created a jolt in the economic growth and resulted in default on loans by many borrowers.

    The NBFC business model is such that they raise short term funds which are lent out as long-term loans. This leads to a situation called an asset-liability mismatch.

  4. And then for the last few years, the monetary policies were focused on controlling inflation and ensure interest rates remained stable. The combined fiscal deficit of the Centre and the state was high. And the government committed to lowering its fiscal deficit, left the government with very little or no space for negotiation to increase its spending to pump the economy.
  5. Globally, the US economy is slowing down mainly due to the trade disputes between the US and China which will hit and affect all, including India, because of its size and importance in the global economy. India is also likely to face problems in its pharmaceutical exports to the US as it is preparing to impose various trade barriers on its trade with India.
  6. Non-food inflation continued to surpass food inflation in the past two years, amounting to income transfers from rural to urban areas. Agriculture remains stressed as food inflation remains low. This resulted in lower earnings of farmers than before. There has not been the promised doubling of incomes. Indian economy being mainly based on rural earning, farmers generates demand for industrial goods and the agricultural population plays a dominant role. Their demand for vehicles, cell phones, agricultural machinery and equipments, consumer goods and services are important life giving force to industrial growth.