Modi may have won the 2019 general election bypassing the economic issues at large but now, arresting an economic slowdown and nursing back the country’s financial sector are among the crucial challenges before the nation.
Indian economy has slowed down to its lowest in five years in the last fiscal and was estimated at 6.8% after a downward revision from government’s estimates of 7% last February. The economy grew at 7.2% in 2017-18.
If the World Bank’s recent projection that India would grow at 7.5% in the next three years, supported by robust investment and private consumption gives some solace to the government, the continuous deceleration in the GDP growth has to be stopped and consumption expenditure in the economy must be boosted. The World Bank, in its Global Economic Prospects released early this month, said that India is estimated to have grown by 7.2% in 2018-19 and is projected to grow 7.5% in 2019-20. “Private consumption and investment will benefit from strengthening credit growth amid more accommodative monetary policy, with inflation having fallen below the Reserve Bank of India’s target,” the report suggested.
The fourth quarter GDP growth at 5.8% was the slowest since 2014-15. The previous low was 6.4% in 2013-14. GDP figures for March quarter also put India behind China's GDP growth rate for the first time in seven quarters. China’s GDP grew at 6.45% in the quarter ended last March.
Agriculture contracted by 0.1% in the fourth quarter against 2.8% growth in the third quarter and 6.5% growth in the corresponding period last year. Manufacturing growth slowed to 3.1% from 6.4% in the trailing quarter.
The question is: What caused this deceleration in GDP growth? According to the finance ministry’s monthly report, “the proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment and muted exports."
Clearly, a fall in growth rate in automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports (non-oil, non-gold, non-silver, and non-precious and semi-precious stones) indicates a slowdown in consumption, especially private consumption despite low inflation in the economy.
When one talks of growth, the first thing that comes to mind is investment. Higher growth requires higher savings and investment. India has not witnessed a favourable trend in either of them in recent years. To bring back the economy on high growth trajectory the government thus, would need to bring investment on track. Gross fixed capital formation, which is net investment in fixed assets as a share of the gross domestic product, was 32.3% in 2018-19, compared with 38.7% in 2012-13 – a fall of 6.4 percentage points in six years.