GDP of India: 6-Years Low

Today we will discuss about GDP of India that is 6-Years low. We all know that there is slowdown in automobile sector. Indian economy is suffering due to many domestic confidence shocks like a bruised credit market leading to credit averse financial agents, demonetization, faulty goods and services tax structure, direct tax uncertainty, farm income compression and rising unemployment. As we all know that the sale of automobile industry is slumped to 18.25 lakh units from 22.45 lakh units. This is steepest fall in 19 years. Let’s analyze why GDP of Indian economy is declining?

GDP:

GDP is Gross Domestic Product. GDP is total value of all final goods and services produced in economy in a given period of time that is one year. GDP includes income of resident citizens as well as foreign nationals that are residing within geographical boundary of the country.

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GDP = C+I+G+(X-M)

C= Private Consumption
I= Gross Investment
G= Government Investment and Government Spending
X= Exports
M= Imports

Types of GDP:

1. Nominal GDP: Nominal GDP is value of all final goods and services that an economy produced during a given year. It s calculated by using the prices that are current in the year in which the output is produced. In economics, nominal value is expressed in monetary terms. If prices change from one period to next and output does not change, Nominal GDP would change even though the output remained constant.

2. Real GDP: Real GDP is total value of all final goods and services that an economy produces during a given year. Real GDP is accounting for inflation and Deflation.

GDP Deflator: GDP Deflator is a measure of level of prices of all domestically produced final goods and services in an economy in a particular period of time.

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GDP deflator=
Nominal GDP/Real GDP*100

How GDP is calculated in India:

In 2015, a new series announced to calculate GDP by upgrading the methodology with new data sources to meet UN standards. In latest Series, base year is 2011-12. Earlier it was 2004-05. MCA-21 is a new data series used for organized private sector. MCA-21 included the data of all companies registered with the Ministry of Corporate Affairs and each company was given a unique 21-digit code. New database covers financial institutions and regulating bodies like SEBI, PFRDA and IRDA. Indian GDP is now measured by using gross value added (GVA) at market price rather than factor cost.
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GDP=
GVA + Taxes on products - Subsidies on products

Old Method of GDP v/s New Method of GDP:

1. The old method measured actual output of manufacturing sector, crop production and employment of services sector.

2. New Method (MCA-21) considers balance sheet data of individual company and gathering the performance of the sector after adjusting for inflation.

GVA: GVA is Gross Value Added. It is measure of total output and income in the economy. It provides rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into production of those goods and services.

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GVA= Output – Intermediate Consumption

GDP of India in present Scenario:

India’s gross domestic product (GDP) growth rate slowed to a six-year low of 5% in first quarter of 2019-20 financial year. The last time the GDP grew slower was in fourth quarter (January to March) of financial year 2012-13.

GVA growth rate: The growth of GVA stood at 4.9% in the first quarter of financial year 2019-20, also the slowest in six years.

(Also Read: Recession: Knocking at door of Indian Economy or Not!)

Causes of declining GDP:

1. Both endogenous and exogenous factors are responsible for it.

2. Steep decline in consumption: Sharp fall in consumption is also major cause of lower GDP. Consumption has accounted for 55-58% of GDP. Consumption is at the core of domestic demand in India. But there is sharp fall in private final consumption expenditure from 7.2% in March to 3.1% in June.

3. GDP Deflator: GDP Deflator has fallen from 4.3% to 2.8% is also worrisome. Low Inflation also impacts consumers. Falling food prices also hurt agriculture income and spending. Nominal GDP growth has fallen from 12.6% to 8% while Real GDP growth has fallen from 8% to 5%.

4. Merging of Banks: Big Bank mergers within the PSU bank space will hurt credit growth further. At a time when growth in economy needs banking system to ramp up lending activity, the bank mergers can cause more disruption. Bankers only look at consolidation of loan book and containing asset quality rather than scale up lending.

5. Crisis in financial sector: NPAs or Non-Performing Assets kept growing due to past wrong decisions. Loans were easily given to corporate sector. The unintended consequence was that it forced the banks to become risk-averse.

6. Insolvency and Bankruptcy code: Under this new code, the ownership of thousands of companies changed within three years. This created supply side constraints. The production has declined due to two reasons:

(a) Most of the companies were shut down by banks.

(b) The companies that were sold to new buyers required time, six to eighteen months, to swing back to normal production.

7. Squeeze in Government Revenues: Due to domestic shocks like Demonetization, Goods and Services Tax there is squeeze in government revenues. The tax shortfall has forced the income officials to send notices to both the companies and wealthy professionals in a bid to shore up revenues. This has created a situation in which business community were frightened and dare not pump in money for growth and expansion.

8. Fall in Stock Prices: Bombay Stock Exchange Index declined by 20-25%. Most of companies had trouble raising money in stock market. Fall in stock prices has resulted in fall in prices. The value of shares by various business persons as collateral to their lenders came down.

9. Mismanagement in calculation: GDP growth figures were over stated and difference between government revenues and expenditure were understated by Indian economic statistic officials. The officials take organized sector as a benchmark. But demonetization has impacted the unorganized sector. With passage of time, the impact on unorganized sector reflected in growth of organized sector. For example: Link between organized and unorganized sector like leather, automobiles, textiles etc.

10. Trade war between U.S. and China: Trade war between U.S. and China because of Donald Trump’s aggressive policies and slower growth on two economies. Ruchir Sharma states that before 2010s it was common for one in every five economies to be growing at 7% or more annually. Now among world’s 200 economies just 8 or one in 25 are on track to grow at 7% like small economies in Africa.

11. Downward trend in agriculture: Downward trend in agriculture because of rising pressure of population on farming and land assets. Other risk factors are pests, diseases, shortage of inputs like seeds and irrigation which has resulted in low productivity and declining yield. The absence of marketing infrastructure and profiteering by middlemen adds to financial distress of farmers. Fluctuations in demand and supply and natural disasters like droughts, floods and unseasonal rains have caused downward trend in agriculture. Falling food prices and construction wages have put pressure on farmers.

12. Downward trend in Manufacturing Sector: Decline in Industrial output growth rate in 8 core sectors that is Steel, cement, fertilizers, coal, electricity, crude oil, natural gas and refinery products. The contribution of manufacturing to GDP in 2017 was only about 16% stagnation since economic reforms began in 1991. India’s industrial output has been declined due to contraction in manufacturing, capital goods and consumer durables. Electricity generation slowed to 2.2% in March from 5.9% in the year earlier and mining to 0.8% from 3.1% passenger vehicle sales declined 17% in April. Consumer durables an indicator of urban demand fell 5.1% compared with 6.2% growth. Declining growth of primary goods and deepening contraction of intermediate goods along with weakness in both investment and consumption activities suggests fragile industrial activity.

13. Prompt Corrective Action Framework has pressed paused button on lending which results in slowed down in bank credit.

14. FRBM (Amendment) Act 2018: Fiscal Responsibility and Budget Management (Amendment) Act 2018 has squeezed government expenditure instead of reducing it to productive uses.

15. Automobile Crisis: Because of 28% GST charged on cars, motorcycles and scooters, liquidity crunch due to IL&FS crisis, increase in ownership costs, GDP is slowing sown. Another reason can be mandatory transition to Bharat Stage VI emission norms.

16. MSME Sector: MSME (Micro Small and Medium Enterprises) employ about 117 million people across various sectors constituting 40% of workforce. MSME share to GDP is about 37%. But demonetization and GST has adversely affected MSME Sector. A study by RBI has noted that GST and Demonetization had adversely impacted overall credit of the sector. GST has led to increase incompliance costs and other operating costs for MSMEs. MSME is facing operational problems like size and nature of business etc.

I Hope you will like this article. The country’s growth pattern is different this time as compared to 2008-09 crisis. India’s exposure to global economies has increased significantly that is from apparel to technology sector. A slowdown could upset other aspects of Indian economy like increased jobless growth.

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GDP of India: 6-Years Low