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Why you should bother about the slow economic growth
India is expected to report its slowest economic growth in 10 years. Analysts foresee the growth in the country’s gross domestic product (GDP), a key measure of the economy, in the fourth quarter of the fiscal year gone by to come in at around 5%. Over the past 10 years, India grew at over 7% each year.
Here are reasons why you should be worried:
The Government tax revenue has been hurt:
The Indian government spends more than it earns in terms of tax revenue and other means. This has led to a high fiscal deficit, which equals the money the government has to borrow from RBI to meet the expenditure. A slowdown in the economy could hit the government’s tax revenues at a time when it is desperately trying to bring down the fiscal deficit. It could also lead to a further fall in government investment in major infrastructure projects that is needed to stimulate growth.
Corporate spending and profits have slowed down:
An economy needs investment from businesses and governments to stimulate growth. According to RBI data, companies are holding back investments for new projects as gross fixed capital formation figures – used to measure the growth in investment – is hovering at around 2%, the lowest rate since 2008-09. For an economy to revive, this number needs to look up. During the high growth phase of over 8 per cent between 2004 and 2008, gross fixed capital formation was around 15 per cent, according to the data. Moreover, the outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps, the RBI says. This will affect companies’ balance sheets.
Inflation adds to the problem:
The Reserve Bank of India has often highlighted the threat of inflation. If inflation stays high, it eats into the growth of an economy. While the headline inflation, as measured by the wholesale price index (WPI), has moderated to an average of 7.3% in 2012-13 from 8.9% in the previous year, it is still high, according to the RBI. This makes any rapid cut in borrowing rates difficult for the apex bank. This is because sharp cuts in interest rates could fuel more inflation as money becomes cheap. Although inflation is expected to ease in 2013-14, a higher-than-expected government spending due to general elections in 2014 or a sharp rise in commodity and oil prices could limit the downside, credit rating agency Crisil said in a note. Inflation could also impede consumer demand. At a time when exports are slowing, the Indian economy is more dependent on its domestic demand, any slowdown in which, could impact company bottomlines.
Weakening of the rupee:
India is a net importer of goods and services. Hence, it runs a current account deficit, which amounts to 5.4% of the GDP. A high current account deficit puts pressure on the value of the rupee. A weakening of the rupee adds to the inflationary pressure. India needs to boost exports. However, an overall global slowdown means prospects for exports to surge are limited.
The Reserve Bank of India expects India to grow at 5.7% in 2013-14 lower than government’s estimates. The sheer rise in the number of stalled investment projects in the India’s economy is good enough a reason for slow growth, according to RBI.
Rs 2,600 crore
Indirect tax evasion of Rs 2,600 crore was detected between October and December last year by the Revenue department, according to a report in Mint, the newspaper. The Finance Ministry has detected custom duty and service tax evasion of at least Rs 400 crore between January and March 2013. According to Arun Kumar, author of The Black Economy in India, India loses Rs 1,40,000 crore trillion ($314 billion) from tax evasion annually, depriving it of funds for investment in roads, ports, and power.