How to make sense of India’s economic headwinds

India’s economic growth is slowing. While the World economic Outlook in July, the International Monetary Fund slashed its annual growth forecast for India to 7% for 2019-20, CRISIL, a credit rating agency expects even lower growth.

Economic headwinds are factors that make growth difficult.

Let us look at the ones which have caused India’s economic growth to decelerate.

Lagging private consumption:

According to the IMF, sluggishness in private consumption has played a major role in India’s economic slowdown. Slowing private consumption indicates that the growth in household incomes have been low-key and higher taxes are being paid by households. This means that with income levels stagnating and higher taxes liabilities, the disposable income which is used by households for purchasing goods and services shrinks causing a drop in consumption levels in the economy. The other aspect is that the level of household savings has gone down in India as consumption has grown faster compared to household income. But when savings continue to get depleted over a period, households try to cut back on consumption. Low consumption stalls production of goods and services in the economy. In order to reverse this situation, the government needs to bring down the level of unemployment and also create higher-paying jobs. Household tax reforms can also boost consumption which can reverse economic stagnation.

Also read: 4 factors that affect India’s consumer sector

Plunging investments:

Property investments have witnessed a sharp decline in the last few years. According to a recent report published by the Federation of Indian Chambers of Commerce and Industry (FICCI), in the first six months of 2019, residential investments of around $450 million were made. This is a significant drop from $1.2 billion, which is the figure for the first half of 2018. When house prices fall, it affects consumer sentiment as homeowners do not feel very confident of spending or borrowing too much which causes a slump in the economy. Private investments and government capital expenditures are also going through a dull period. According to the CMIE (Centre for Monitoring Indian Economy), in June 2019, investments in new public sector projects fell by 84% compared to June 2018 and private sector investments reduced by 89%. Higher investments push manufacturing and output, create more jobs, lead to rise in income and boost consumption. In order to counter the economic slowdown, the government will have to implement reforms for bringing in more investments.

Also read: 6 things to know about India Inc’s investments

High revenue deficit:

India’s revenue deficits have been steadily rising which has also created a strain on the economy. The percentage of revenue deficit in the fiscal deficit—it has gone up from 64.7 percent in the 2018-19 revised estimates to 68.9 per cent in 2019-20 in the budget estimates. Revenue deficits arise when the government’s revenues are insufficient to meet the day-to-day expenditures of the government. When the revenue deficits, run high the government has to either increase borrowings or use the savings of other sectors of the economy to finance its expenses or raise taxes. High government borrowing causes interest rates to rise, making loans more expensive, which will have a negative effect on economic growth. The revenue deficit reduction will decrease the fiscal deficit and it will also promote savings and investment.

Bleak scenario of exports:

India’s exports have also not been faring well of late. The global economic slowdown, the ongoing trade war between U.S. and China, the recent withdrawal of trade concessions on Indian goods by the U.S. and the imposition of heavy taxes on imports to fend off foreign competition – all of these have resulted in a decline in exports. Besides suppressing consumption and demand, factors like low investments, lack of high-paying jobs, heavy taxes have affected exports also. According to the commerce ministry exports in June fell 9.71% to $25.01 billion. When exports rise, it means the output from factories and industries increases. This leads to a greater number of people being employed in those factories. The goods and services that are exported lead to a flow of funds into the country, which increases consumer spending thus helping the economy to tackle a slowdown.

Also read: 4 things to know about impact of trade wars on India

One related number : Rs 4.32 lakh crore

The government’s fiscal deficit stood at Rs 4.32 lakh crore for the June quarter which is 61.4 percent of the budget estimate for 2019-20. The government’s full year target of fiscal deficit is Rs 7.04 lakh crore. This means that the government has already crossed 60% of the full year target of fiscal deficit.

Related links:

  • No recovery in sight for the Indian economy: Read more to know how the major macroeconomic indicators have performed till June 2019 and how they have contributed to the economy’s slowdown
  • Everything you should know about India's current economic slowdown Read more. This article highlights the impact of the lull in exports, the corporate sector, the FMCG and automobile segment and the global economy and maps them with the current sluggishness in the Indian economy.

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