The latest report on first-quarter GDP growth to be 5.7% as against the expected 6.5% to 7% comes as a shock.
While demonetisation and GST are highlighted to be the prime reasons, a closer look at the economy brings out various other significant factors behind the slow down.
What factors have failed to promote growth?
De-stocking of goods prior to GST, and the impact of demonetisation are factors which directly impacted the growth rate.
However, there are other factors which failed on their purposes against the expectation of promoting growth. These include -
The remonetisation process after the demonetisation drive should have brought the economy back into growth tract.
It should have also opened up avenues for expressing the consumer demand which was cramped during the demonetisation phase.
Government had also made unrestricted spending which is supposed to have boosted the economy.
Also, it has been a year of good monsoon and favourable commodity prices.
But all these failed to produce favourable results, further calling for serious attention to the causes behind slowing growth rate.
What are the other reasons?
The twin balance sheet problem with mounting debt of corporates and the resultant impact on banks' conditions.
This has fell sharply on both investment and lending especially with the declining profitability of the power and communications sectors.
Reduction in farm revenues because of falling non-cereal foodgrain prices and resultant compressed demand.
Also, fiscal tightening by the states to keep budget deficits on track added to the problem.
A holistic view reveals that there is a more serious demand and hence investment crisis which is crippling the economy at present.
Are conditions favourable for reviving growth?
The rebound of present economic situation is doubtful, given various factors and conditions.
The gross fixed capital formation is weak, further reducing the possibility of any investment revival.
Given that government has already spent heavily, any further investment would only retard India’s fiscal consolidation efforts.
Also, various indicators on the manufacturing sector do not seem favourable for promoting economic growth.
RBI's industrial outlook survey brings out the unfavourable demand conditions across parameters and especially on capacity utilisation, profit margins and employment.
Also, deteriorating consumer sentiment are not promising for a demand rebound.
What lies before the government?
Government could think of relaxing its stand on fiscal consolidation and make increased capital spending to revive the economic situation.
Government should tap the optimistic potential of the buoyant services sector and utilise the opportunities it holds for economy and job creation.
Also, it should focus on the potential small and medium enterprises and correct the negative effects of GST on them.
Above all, it is high time that government addresses the slow growth of bank credit and the debt overhang problem.
Only this will ensure a better investment climate and boost manufacturing.
Focus should shift from short-term effect of structural reforms such as GST and demonetisation and turn to the larger investment and demand crisis.
