Economic Slowdown

What is the issue?

In the backdrop of slowing economic growth, it is essential to analyse on the signs of recovery.

How is the economy at present?

• The economic growth has slumped to 5.7% in the first quarter of the current fiscal year, the slowest pace of expansion in three years.
• The overall consumption demand has gone down, especially the rural demand, primarily driven by the effects of demonetization and farm crisis.
• The private sector companies are not in sound financial health to launch new projects, largely because of the excess debt.
• Some transient factors are attributed to this current slowdown, which include:

1. inventory destocking by companies before the implementation of GST.
2. technical problem of the deflators used to convert nominal output growth to real output growth.

How are the signs of recovery?

• The possibility for the economy to bounce back once these transient factors go away are uncertain or rather the signs are mixed.
• The favourable signs are:

1. The manufacturing purchasing managers index (PMI) moved into expansion territory in the recent month.
2. High-frequency indicators such as cars, two-wheelers, tractors, air traffic and railway freight are positive.
3. The foreign trade sector also offers scope for hope.

• The unfavourable signs are:

1. The services purchasing managers index (PMI) is not very optimistic.
2. The data for cement, coal and steel continues to be disappointing.

• A comprehensive look at these high-frequency indicators suggest that economic growth in the second quarter could see some recovery.
• However, it is to be noted from the precedents that the business cycle takes time for recovering from the slowdown point.
• Also, the expansion of the Indian economy without affecting the inflation target is a challenge.

What is the way forward?

• The economists in the finance ministry, the RBI and the new economic advisory council will have to address these technical challenges.
• The policymakers and investors have to differentiate the transient factors from the structural ones which are behind the current slowdown.
• A clear economic thinking on the structural causes can ensure that the economy is not further pushed down but is taken on the path of recovery.

Source: Livemint