On February 6, 2020, Prime Minister Narendra Modi stated in the Indian parliament that India’s economic fundamentals are strong. A similar sentiment was expressed by Finance Minister Nirmala Sitharaman while presenting Budget 2020.
A large number of economists and observers have been pointing out the precarious economic condition of India for quite some time. A few days ago, the International Monetary Fund (IMF) warned about the weakening global economy and blamed India’s economic slowdown as a factor for this. Different reputed rating agencies have been continuously downgrading the economic prospects of India not only for the current fiscal (2019-20) but for the upcoming one or two fiscal years.
What are economic fundamentals?
In social sciences, it is not always possible to generalise or particularise the cause and effect relationship among different related variables. But in practice, one comes across economic fundamentals in economics texts and discussions.
Text books on economics define economic fundamentals as basic economic measures such as interest rates, government income and spending, exports and imports, confidence level of the investors, inflation rate, employment rate, realty prices, and stock prices. If these are favourable for the high growth of GDP, then fundamentals are considered to be strong. But it is not always true or that simple.
It is known that low interest rates in an economy tend to increase investment as interest rate is the price of investment funds. But this may be true when the economy is on a rising trend. But when it's in a downward slope and investors are unsure about their return by selling the products at a desired level, investors may not be interested in investing even at a lower rate of interest. This tendency will be more prominent when there is a large excess capacity in the economy. In this situation, low interest rates will not increase investment. On the other hand, it may further intensify the economic slowdown. This is because low interest rates mean low income for many people whose livelihoods depend on interest earnings. Therefore, when their incomes fall, the demand level in the economy may also fall. So, low interest rates cannot always be a good thing for an economy.
The first thing is that the growth rate of the GDP has been falling for quite a number of quarters and this is expected to come down to just over 4.5% at the end of this fiscal. The core industrial output growth indicators are either negative or very low. Non-food credit growth has gone down to little over 7% from 18% or above. The credit growth is good only in the case of retail loans. Both the export and import markets are weakening. If the stock prices are taken into account, then one can see that both the Nifty 50 and the BSE 30 indices are historically high. But analysts have categorically shown that stock prices’ are rising due to escalation of only a handful of stock prices. Prices of almost 80% of the listed stocks are either flat or downwards.
A section of economists consider employment to be a dependent variable of the economic fundamentals. That is if economic fundamentals are strong then employment will be higher. High employment means high purchasing capability. This means high demand for goods and services in the economy. This is particularly important when the purchasing power of the common masses is high. When common people get employed, his/her marginal propensity to consume is higher than an economically established person. Most of the extra income is likely to be spent than saved.
Unemployment has been rising in India. One NSSO leaked report shows that by 2017, the unemployment rate was 6.1%, the highest in 45 years. A recent Centre for Monitoring Indian Economy (CMIE) report shows that in the third quarter (from September to December) of this fiscal; the unemployment rate has increased to 7.5%. The report also reveals that among the Indian population between 20 and 24 years of age, the unemployment rate has reached 37%. This is perhaps highest in recent years.
In this situation, economist Kaushik Basu reportedly tweeted, the government must intervene. The Indian government is hopeful about the economy as India is going to be the youngest economy in a few years and it is expected that this demographic dividend will open up economic opportunities. But Basu thinks that if the younger generation does not get jobs then restlessness in the economy will increase and instead of having demographic dividend, the situation may backfire.
The purchasing power of the economy is very low. The main reason is the fall of the purchasing power in the rural sector. It known that during the last three years or so, rural sector real wage rates growth is either falling or been stagnant. On the other hand, the wage rates of the urban sector are rising but very slowly. Therefore, the problem of the economy is not a cyclical one. A serious restructuring is needed.
Is it really true that the government is unable to diagnose the problem of the economy? It is hard to believe when almost all the well-known economists have been publicly giving their interpretations and have suggested that increasing the purchasing power of the people can aid the economy at this juncture.