Economic Recession: Reasons and Measures

Recently the National Statistics Office (NSO) has released the first advance estimate (FAE) of the country’s economy statistics for the current financial year (2019-20). According to official figures, the gross domestic product (GDP) in the current financial year can come down to 5 percent. It is known that India’s GDP growth rate was 6.8 percent in the last financial year (2018-19). If the GDP growth rate is only 5 percent in the current financial year, then it will be the lowest growth rate in the last 11 years. Given the current state of economic indicators, it can be said that it is not possible to change the projected rate much. In such a situation, a question has also arisen as to whether India is on the verge of a massive recession?

Statistics were disappointing in second quarter also

growth rate
  • According to data released by the NSO in November last year, the country’s GDP growth rate fell to 4.5 percent in the second quarter (Q2) of the current financial year, the lowest level in the past 26 quarters.
  • The total value of GDP of the country in the second quarter of the current financial year (2019-20) was about 35.99 lakh crore rupees, compared to 34.43 lakh crore rupees in the first quarter (Q1) of the same year.
  • A decrease in private final consumption expenditure (PFCE) for the second quarter has also been observed. While PFCE was 9.8 percent in the second quarter of the last financial year (2018-19), it had fallen to 5.1 percent in the second quarter of the current year.
  • Manufacturing sector underperformed in the second quarter and fell to its lowest level in the last two years. According to statistics, the manufacturing sector grew at (-) 1 percent in Q2, compared to 6.9 percent in the second quarter (Q2) of the previous year (2018-19).

Estimated figures for the current financial year

  • In FY 2019-20, GDP at constant prices (base year 2011-12) is estimated to be Rs 147.79 lakh crore, as against Rs 140.78 lakh crore in FY 2018-19. Thus the GDP growth rate in the current financial year is estimated to be 5 percent.
  • The growth rate of manufacturing sector is estimated to be 2.0 percent in FY 2019-20, while it was 6.9 percent in FY 2018-19.
  • The growth rate of construction sector has been estimated at 3.2 percent in FY 2019-20, while it was 8.7 percent in FY 2018-19.
  • The growth rate of ‘Agriculture, Forestry and Fisheries’ sector is estimated to be 2.8 percent in the current financial year as compared to 2.9 percent in the last financial year.
  • The per capita income at constant prices has been estimated to increase to Rs 96,563 during the current financial year as compared to Rs 92,565 in FY 2018-19. Thus the growth rate in per capita income during the financial year 2019-20 can be 4.3 per cent as compared to 5.6 per cent in the previous financial year.

What are the reasons?

gdp growth rate
  • The problem of structural demand along with some cyclical factors can also be attributed to the current state of the Indian economy.
  • Despite steady income, private consumption, which is the biggest driver of growth, is being financed in the last few years through some means such as low savings, easy credit and the seventh pay commission, but it does not prove to be effective in the long run. Can.
  • The domestic savings rate has fallen to 17.2 percent of GDP in FY 2018-19 from 22.5 percent in FY 2013-14.
  • The credit system of the country has been greatly affected by the recent NBFC crisis, which has also seen adverse effects on its lending capacity.
  • The rural economy of the country is grappling with the problem of stable income of farmers on a large scale. According to statistics, the average growth rate of rural wages in the last five years has been 4.5 percent, but with the adjustment of inflation it becomes only 0.6 percent.
  • The key drivers of economic growth are a clear indication that the scope for rapid growth in the near future is quite limited.
  • Reduction in private consumption is a structural theme that is directly linked to lower household income growth and lower household income is related to basic problems such as low employment generation and steady income. It is difficult to address any of these problems in the short term.
  • Given the data, there is no possibility of private investment growing rapidly. According to data related to Q2 released by the NSO, private investment hit the lowest level in the past 29 quarters.
  • In addition, public investment, which had been playing an important role in economic growth for the past several years, is also under stress.

Income tax deduction is not a measure

income tax
  • Income tax reduction is being seen as a way to deal with the current state of the economy. However, many analysts believe that a cut in income tax is not a good option to improve the economic condition of the economy.
  • The main reason for this is that the number of income tax payers in India is very low and those who pay income tax will not mind the slight reduction in income tax. Thus, if income tax reduction is adopted as a measure, its benefit will reach a very limited number of people.
  • Instead of income tax cuts, more and more financing of rural areas can be seen as a better option. Investing in infrastructure and employment in rural areas (eg, MNREGA and PM-Kisan) etc. will help the sector to emerge from the effects of recession.

Road ahead

  • To improve the economy, the financial sector of the country, primarily the NBFC, needs to be reformed. A lot of efforts are being made to improve the health of the public sector, but some special sectors like MSMEs require the flow of credit from NBFCs.
  • The economic reforms done in the last few years have done the work of building capacity of only a few of the top people of the country, but it is necessary that the people standing in the last line of society can also benefit from the coming reforms.
  • In addition, given the difference in infrastructure in the country, it is necessary that the role of the private sector in the construction of infrastructure is further enhanced.

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