Countering slow growth

O N Koul
Our economy has been growing at a slow rate from past some years and it is a cause of worry to policy makers, economists and the common man as well. But the NDA Government and the BJP is busy painting a rosy picture of the economy and this window dressing will hardly alter the ground reality, and the sluggishness of the economy continues to haunt the Indian economy. Thus there is the urgent need to address this slow down in the economy .For this purpose monetary and other steps should be taken. Although India remains one of the fastest growing economies of the world but the slowdown has taken hold in India. The slowdown as measured by growth rate of real GDP started in 2016-17. The deceleration in the aggregate economic activity is visible since 2015-16, a year before that indicated by real GDP, with the growth rate changing by 0.15 percent, 0-95 percent, and 0.30 percent over the last three years. From the multiple sources one can see the same picture about the state of the economy. As per the reserve bank of India, IMF, world bank and other such agencies, the growth rate of the economy will further slowdown in the year 2019-20.The ongoing slow growth rate is unprecedented in terms of its duration. In the last twenty years the growth rate in terms GDP has never declined continuously for more than two years.
It is reflected in the large potential loss of output and income. The timing of this slowdown suggests that four factors have contributed towards the slow growth rate of the economy .It is in the fitness of things to throw light on these factors to know how these factors or shocks impacted the economy. A combination of four negative shocks affected the economy and thus is responsible for the slowdown of the economy. The demonetization of the currency in the year 2016 had given a big shock and jolt to the currency in circulation. The sudden ban on high denomination currency which comprised86 percent of all currency had a large negative effect on economic activity. It lead to contraction in bank credit and output .Economy had hardly recovered from the shock of demonetization, the Government experimented another policy measure of GST-Goods and Services Tax which affected economy badly. GST-another negative shock came into effect in July 2017, and according to economists and policy makers as well as commentators had a massive negative impact on the economic activity. The third shock appeared from financial sector. Since the early part of this decade, the shadow banking sector, which is part of the financial system that is effectively outside the regulatory preview of the monetary authorities ,has been growing rapidly. This growth was due to the long standing problem of NPAs in the banking sector which resulted in the slowdown of the credit growth from the formal financial sector. The problems of the shadow banking sector came to fore with the ILF crisis in September 2018.All this resulted in decline in the credit growth which affected badly the consumption expenditure and thus the overall economy .It also affected the growth in automobiles ,real estate ,cement and other related sectors .The final shock comes from global slowdown which is outside the control of the country .Growth has been slow in the global economy since 2012.This has reduced the contribution of the external sector in the India’s real GDP growth since 2014-15 and turned it negative in 2017-18.In order to counter the slowdown of the economic activity the policy makers give boost to domestic demand in the short run and reverse the investment decline in the medium run .The combination of the three policy moves can form a good strategy to combat the slow economic growth. Increasing wages in MGNREGA would boost rural demand and increasing the disbursal for food subsidy is an important way to counter the slowdown in the economy. This will also give boost to public investments especially in agriculture and infrastructure which would lead to increase in investment cycle and ease supply constraints .In fact these measures are more for increasing demand than reducing interest rate on corporate houses. The window dressing of the Government will serve no purpose instead the policy planners should focus on the measures given above to counter the slow growth in the economy.
(The writer is a columnist and social activist)
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