Critical analysis of the recent slowdown of Indian economic activity.
Actualizado: may 15
Introduction: Understanding India's economic slowdown
India’s Economic growth has slowed for 5 consecutive quarters beginning from late 2015-16 onwards. India’s GDP growth has fallen from a high of 9.2% in 2016 to 5.7% in 2017. The current economic crisis gives an overview of the economy in distress, a banking system in pain, and consumers too worried about job cuts and rising costs to spend.
Here, one needs to understand the various reasons that led to the economic downturn. In just a few years, India has gone from being one of the world’s fastest-growing, IT sourcing-led export-oriented economies to a protection-seeking laggard.
The question here is, ‘What accounts for a quick and sharp reversal of economic performance?’, ‘Is it a problem of mere perception or hard reality based on credible evidence?’ To have an answer to these crucial questions, one needs to look upon the quantitative account of economic performance in the last decade. So, understanding the recent economic slowdown is also understanding its past performances.
During the 2000s, (between 2003-2008), India’s annual growth rate touched between 8-9%, with price stability, with model fiscal and BOP deficits. The boom is also associated with a sharp upturn in the investment rate peaking at 38% of GDP in 2007-2008.
The global financial crisis, then upended the boom and it affected India for main two reasons:
• Strict Financial Regulations
• Large and closed domestic markets.
After a brief dip in 2008-2009, India witnessed a V-shaped recovery that lasted till 2011-12, due to accommodative monetary and looser fiscal policies.
In 2006, however, at the height of the boom political scientist Atul Kohli, cautioned against the impact of the reforms that were not so much pro-market, but pro-business with benefits accruing mostly to powerful business groups.
As the boom petered out, at the turn of previous (2011-12), a revolt against cronyism and capitalism, exploitation of land, labour and scarce natural resources came out into the open. The judiciary played a part to put an end to these exploitative relations. Massive protests across the country was prevalent regarding corrupt practices despite the economic growth.
The aftermath of the "Dream run" or boom
Gradually, domestic saving, investment, capital inflows started trending downwards. Inflation ruled high on account of international oil prices and the BOP deficit became precarious for a while. Decelerating output growth affected the earnings of corporate and hence their ability to serve the enormous debt that accumulated during the boom. Corporate bad debts even got translated into the banking sector’s NPAs (Non-performing assets) as firms could not repay loans, thus inhibiting bank’s ability to offer new loans.
Drooping outcomes since 2014-2015
Considering that the economic situation in the country was gradually deteriorating, the NDA (National Democratic Alliance) government, thought of resolving the issue based on the agenda of development, eradication of corruption, and enforcement of rule of law. The incoming government vowed to use financial regulation to probe and punish financial wrongdoings.
Their idea of “minimum government and maximum governance” inspired by Margaret Thatcher and Ronald Reagan to consciously promote free-market ideals resonated well with global financial elites and globalised Indian Community. The government, devoted its considerable administrative capital to improve India’s ranking in the World Bank’s Ease of Doing Business (EDB) index, and rank did move to 63rd position in 2019 from 142nd position in 2014, which was an achievement indeed.
But the greatest policy shock came in the time when the government in order to eradicate black money and to encourage the use of digital transactions demonetised the large-valued currency notes of Rs 1000 and Rs 500 which accounted for almost 86.4% of the total value of the currency in circulation. This macroeconomic shock devasted the informal sector, which employs nearly 90% of the workforce and contributing nearly half of domestic output.
Again, the GST to replace various indirect taxes was a second shock in less than a year. Adversely affecting small and informal enterprises, thus leading to a severe shortfall in tax collection; it has affected government finances and the sharing of revenue between Centre and States.
Economy's fall in the trough due to the pandemic
The economy, when was already in shock, the recent coronavirus pandemic aggravated the situation more. The nationwide lockdown brought social and economic life to a standstill.
Decoding India's economic slowdown: a critical assessment
The deteriorating economy of the country can be greatly accounted to the government’s inefficient policies and their unplanned implementation. The incidents leading to the crisis, that have been discussed above can be critically analysed and assessed which may help us to deduce solutions for the same.
The Global Financial Crisis, during this period, affected financial markets bringing Wall Street’s giants to their knees and triggering the Great Recession. This badly affected India, as before the crisis, the Indian economy was already slowed due to the tightness of Monetary Policy.
NDA Government strategy
NDA government’s economic strategies faced large criticisms among the economists. From the time it came to power till recently the different economic policies taken by the government have been talk of the town, among researchers, scholars, academicians, etc.
DEMONETISATION: There have been two distinct strands of criticisms against the demonetisation measure. One of its disastrous consequences for the peasants, the petty producers and labourers in general, in short, the vast working masses. The other is the deleterious effect on the country’s GDP growth rate.
GST: After demonetisation, the second disruptor was GST. The one-step rollout of the GST created panic in the businesses. The smaller business complained about the cumbersome process of tax filing, making the biggest indirect tax reform, an impediment in business. All in all, the cost that the whole process of GST required really was heavy to an already crippled economy.
Pandemic and Lockdown: According to Prof Jayati Ghosh, the most disruptive effects of Covid- 19 in India have not been the result of the disease, but the nature of the government response. The most stringent lockdown destroyed the economy forcing millions into poverty and hunger, even without any improvement in the stop of transmission of the virus. The lockdown dealt a massive blow to both demand and supply but with even greater effects on employment. The worst affected were migrant workers (about 100-150 million people). The slight lockdown restrictions were eased somewhat in the month of May 2020; but the slight revival in employment was not matched by equivalent wage incomes, as wages and self-employed incomes remained much lower than before.
This unfortunate combination of failure to control pandemic among the extreme economic distress can be critically analysed due to the following reasons:
• Excessive centralisation and top-down control without coordination between the center and the state.
• Adoption of containment strategies not suitable for the Indian context.
• Inadequate government spending to increase demand counter the economic collapse, where government spending in the healthcare system is necessary during the time of the pandemic. This clearly states the lack of investment in the healthcare system.
• Misplaced focus on measures to increase Liquidity
1. Ghosh, Jayati (2020): “ A critique of the Indian government’s response to the Covid-19 pandemic ”, Journal of Industrial and Business Economics, Published: 11th July 2020
2. Joseph, Mathew (2009): “Global Financial Crisis: How was India impacted?”
3. Nagaraj, R (2020): “Understanding India’s Economic Slowdown”, Issue: February 7,
4. Singh, Manoj (2021): “The 2007-2008 Financial Crisis in Review”.