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It is not recession, economy is growing but at slower pace. Question is why

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It is not recession, economy is growing but at slower pace. Question is why

At 5 per cent, India's economy registered its slowest gross domestic product (GDP) growth rate since the Narendra Modi government was first voted to power in 2014. The latest GDP growth rate heightened concerns about slowdown with some apprehending that recession might set in.

However, the current GDP figures are no indication of any impending recession, which anyway does not have an accepted-by-all definition. But it generally refers to contraction of a country's economy in two consecutive quarters. In such situations, banks and other financial institutions fail. The US witnessed such a situation in 2008-09.

In India, the economy is growing. Only the rate of growth has slowed down, which is a huge setback for the country as it requires an accelerated growth to provide employment to millions entering the job market every year. A slowdown in growth rate would turn the population dividend into an unmanageable burden.

A little gyaan before we move

A sub-5 per cent GDP growth was last witnessed in 2013-14. Three of the four quarters witnessed sub-5 per cent GDP growth rate. The annual growth rate figures for that year was also sub-5 per cent. This was the second year in a row during which the economy's growth had remained below 5 per cent. Before 2012-13, the last time the GDP growth rate had slipped below the 5-per cent mark was in 1984-85 and continued till 1987-88.

But these instances of low GDP growth rate were blamed mainly on lack of policy decisions. In 1980s, the economy was crumbling, pushing India almost to a defaulter's state before PV Narasimha Rao government announced the opening up of the economy. Manmohan Singh was the finance minister then.

During 2012-14, when Manmohan Singh was prime minister, the GDP growth slipped below 5 per cent mark on the account of what is now known as policy paralysis.

Back to the present

The current slide in GDP growth -- for four consecutive quarters -- is interspersed with a series of policy decisions. Two mega policy decisions -- demonetisation in November 2016 and the rollout of the goods and services tax (GST) in July 2017 -- disrupted the Indian economy.

Aimed at greater formalisation of the Indian economy, the twin disruptions struck a big blow to the informal sectors that employ the maximum number of the workforce.

The policy disruption hangover still continues and is accentuated by the crisis in banking and non-banking financial sectors. This hit the small and medium scale businesses more adversely than expected in the wake of the collapse of Infrastructure Leasing and Financial Services (ILFS). Money just stopped flowing into the market. The net result was a huge job loss.

Jobs are the real key

The accurate estimate of job loss due to policy interventions is not available due to contrasting claims -- ranging from 40 lakh to 4 crore since demonetisation. According to the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in July 2017 -- when GST was rolled out was 3.4. It has been growing since then and for week ending August 25, it was at over 9 per cent.

Jobs have been lost in huge numbers. Rural India has suffered more due to loss of employment. This shows in consumption pattern. Rural consumption shows greater declining trend than urban. Declining consumption or low demand forces manufacturing firms to cut down their output. Sustained low consumption rate leads to layoff in companies, closure of factories, showrooms etc. This is visible in every state of India.

Money eats/begets money

In the time when economy is spiralling down, investment pushes the growth figures up. But private investment is dismal in the country -- at a 15-year low. The government, on the other hand, does not have enough money to invest.

Private investment has declined in India on account of three main factors -- low demand, policy interventions and global factors. The lingering US-China trade war has kept the global investors guessing about what could be a better and profitable investment. The impact is not limited to India only. This investment caution turned into a sort of investment paralysis due to uncertain Brexit deal.

The budgetary provision for a super-rich surcharge on foreign investments added to the woes. The three factors combined to see an FII (foreign institutional investor) pull out from India to the tune of $2.2 billion in 10 months.

A look within

At the same time, the Reserve Bank of India (RBI) largely adopted an inflation-centric policy leaving lesser amount with the bank to lend to the industry. The RBI has recently adopted a more favourable approach in its policy giving breather to the government.

While FIIs pulled out huge amounts of money from India and private investment was sagging, the government could not push its own money into market.

The government was dealing with the non-performing assets of banks, the NBFC crisis and making sure that the fiscal deficit target is not breached as this would have cascading effect.

The economy is growing and the prime minister is set -- an improbable target at this rate of GDP growth -- on turning India into a $5 trillion economy by 2024, the government expenditure comes from the revenue it earns not from the size of GDP.

Fiscal deficit constraints means the government cannot borrow money beyond a limit. This leaves a very little elbow room for the government to invest. This is the state of Indian economy right now. It is expanding but at a reduced pace. It is not recession or mandi.

Latest policy announcements by the government including withdrawal of super-rich surcharge are likely to bring back investment and create jobs, and hence push demand for consumption. If that happens, it will give a fresh kick to Indian economy.