India’s Economic Slowdown

The years 2018-2019 haven’t been particularly pleasant for India. The military face-off with arch-rival Pakistan, the intensifying Kashmir dispute and the declining economic growth are some factors that have smeared India of its former reputation as a stable state. The Central Government has more or less solved the Kashmir dispute, however, the economy continues to decline.

The Modi Government was re-elected in May 2019 with a crushing majority. After re-election one of the main objectives of the Government was to increase real GDP growth to 8% in order to fulfill the 5 trillion economy dream by 2024. However, with shrinking investment and lack of demand in major economic sectors, the Government currently struggles to cope up with this crisis. GDP growth rate this quarter was a poor 5% which is the lowest in the past 6 years, unemployment is at an all-time high, major sectors of the economy especially the automobile sector has seen a whopping 36% decline in sales. Major employment generating sectors – manufacturing and real estate have seen a drastic decline. The situation is so alarming that some organizations claim that India might soon face an economic recession.

Major international institutions and organizations including Harvard and IMF assessed the Indian economy and issued reports. The report from IMF states that the GDP growth rate is much weaker than expected, the report claims that uncertainty due to environmental regulations and weaknesses among various non-banking financial companies are the primary causes of the slowdown. Other organizations blame government policies like demonetization for the crisis.

There are a plethora of reasons which may have caused the economic slowdown. What India desperately needs are major reforms to boost the economy. Reforms which increase foreign investment, untangle the financial and legal systems and focus on increasing employment generation. The Government opted for an impromptu approach to fix the crisis. The press conferences weren’t reassuring. Recently, however, the finance minister Nirmala Sitharaman announced a major slash in corporate tax. This slash may act as an incentive for companies to increase their production in order to take advantage of the reduced costs. The corporate tax cut also has the potential to increase foreign investment. After the announcement the Indian stock market skyrocketed, giving much-needed hope to investors across the country. The short term gains from this tax slash were remarkable however, the long term gains remain to be observed. Nirmala Sitharaman claims that the government is planning to implement numerous structural reforms in the coming months to revive the economy to meet the 5 trillion goal.

Different institutions have different opinions on the current situation. Some blame the government, some say the slowdown is due to a global recession, some claim that the crisis is cyclic, not structural. However, what stands true is the fact that the situation at hand will test the Government’s efficiency and judgment to the maximum. The government’s ability to handle the situation is what would define India’s financial global position for the next five years. The government has a lot to deliver in a short span. The citizens need to be patient and optimistic through this transitionary phase.