India, the world’s fastest-growing economy hits brakes. Economic crises - What went wrong?

With a massive win in 2019 General election people of India have once again shown trust in Modi government. Completing its crucial 100 days in office, Government has brought many policies, decision. While the government brags about their achievements, opposition criticizes the government. Truth is hidden somewhere in between.

Current scenario

• FMCG (Eg Parle G) is affected as slowing economic growth and falling demand in rural areas cause production cuts.

• The downfall in automotive sales points to a coming industry recession.

•  SBI cuts interest rate on fixed deposit

• Prime minister office in a letter to the National Highways Authority of India (NHAI) asked for the slowdown of projects.

Finance Minister Nirmala Sitharaman took these recent Measures

·  Tax reduction allowing any domestic company to pay income tax at the rate of 22% subject to the condition they will not avail any incentive or exemptions.

·      Manufacturing companies set up after October 1 to get the option to pay 15% tax. The effective tax rate for new manufacturing firms to be 17.01% inclusive of surcharge & fee.

·      No Reduction In GST For The Auto Industry

Watch how 5 trillion Economy is achieved

First, let us know about the GDP (Gross Domestic Product)

It is the total value of everything that is produced in a country. GDP is calculated within the country boundaries.

Components for calculating GDP

Personal Consumption Expenditure

+Business Investment

+Government Spending

+Exports

-Imports

=GDP

The growth rate is a percentage increase in GDP from quarter to quarter.

This rate indicates whether the economy is growing or decreasing.

According to the World Bank

“At $2.73 trillion, the economy of India pushed to 7^TH spot from 5^TH.”

According to Business Standard

“July was the worst-performing month in the last 17 years for the stock market.”

The auto sector contributes nearly 7% to the country GDP is facing worst downfall.

Economic crises never arise suddenly. It comes with a warning.

What are the factors responsible for this Economic Downfall? 

1)    Demonetization

On 8th November 2016 suddenly withdrawn currency notes of 500 and 1000. This decision resulted in reduced cash in the market. Which directly affected consumer market, investments, agriculture.

Government ignoring advice on immediate plan. Reserve Bank of India cautioned the government against demonetization in writing. Former RBI Governor Raghuram Rajan did so orally.

Former prime Minister of India and economist Dr. Manmohan Singh said

“We might see a decline in GDP by 2% as a result of what has been done.”

GDP growth rate

2015-16: 8.01%

2016-17: 7.11%

2017-18: 7.2%

2018-19: 5% Q1

In first four months after the demonetization businesses were down by 50% most affected were small traders.

2)    Wrong Implementation of GST

GST Is well defined and most efficient tax collecting method. However, improper structure, planning, and implementation of GST in India also affected economic slowdown.

Idea of introducing GST was first proposed by then Finance Minister of India P. Chidambaram in his budget for 2008-7.

The concept behind GST implementation in India was to reduce the tax burden on both Companies and Consumers.

Let me explain the simple GST implementation in India

Jeans Manufacturer ABC buys raw material for

Inclusive of 10% GST

1000rs  -  Price inclusive of GST

100rs    -  Margin

Total- 1100

Under old rules he had to pay 110rs on sale, Since he bought raw material with included GST of 100 rs now he has to pay 100- 110( 10% of 1100)= 10rs.

Retailer buys Jeans at 1100rs inclusive of GST. He adds 100rs margin making total sale price 1200rs. Under the old rule, he had to pay 120rs on sale.

Since he bought Jeans with included GST of 110 rs now he has to pay 110- 120( 10% of 1200)= 10rs.

Goes on till Consumer buys Jeans with paying GST of 10% at 1300rs. 

What trader, manufactures pay is 10rs and end consumer pay is 130rs.

GST has been a relief for traders and manufacturer but a disaster for the end consumer. Hence the consumer market affects most contributing to the economic slowdown.

3)    Consumer Goods market

Automobile, Biscuits, Consumer Goods Company, have shown fall sales. Recent floods in 13 states affected the livelihood of people. This is also one of the reasons for the downfall of sales.

4)    Central Government + State Government

·  Various state government are suffering from an adequate capital reserve, electricity prices are being increased, and increasing electricity while the country is under economic slowdown will result in more severe condition.

·     State government spent less in development projects.

·     The central government increased corporate tax

·       The state government did a large number of loan waiver

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What immediate measures are needed to overcome economic slowdown?

1) State and Central Government have to take the risk and invest money in the market.

2) The state government has to invest in projects which will give returns and create a demand.

3) Stopping investment in several projects and limiting to few demand-oriented projects.

4) Banks need to cut the interest rate on industrial and housing loans.

5) More rural investments, Improving credit flow to both consumer and industry

6) Change GST collection to quarterly for companies below 1corer.

7) Incentives to auto sector on shifting to electric vehicles.

8) Temporary reduction in stamp duties of real estate.

9) Skill advancement in electric vehicles for employees displaced by auto sector layoff.