GDP Analysis

Indian Economy losing its Growth Momentum
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Indian Economy Losing It's Growth Momentum

Indian Economy Losing It's Growth Momentum

As per the data released by the National Statistical Office India’s July-September 2019 (Quarter 2) gross domestic product (GDP) growth rate fell to 4.5%, the lowest in more than six years, compared with 7.1% in the same quarter of 2018-19. The low rate of expansion was mainly on account of a weak manufacturing, falling consumer demand and private investment, and a drop in exports due to a global slowdown.

What is GDP and GNP?

  • GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year). It is slightly different from the other commonly used statistic for national income — the GNP.
  • The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
  • For example, if Apple manufactures its mobile phone worth $1 million within India, then this $1 million will be counted in India’s GDP and US’ GNP. On the other hand, if the US office of Infosys created software worth $1 million, then it will be counted in US’ GDP and India’s GNP. It is the domestic boundary that distinguishes the GDP.

How GDP calculated?

  • GDP can be calculated by using three methods—the supply or production method, the income method and the demand or expenditure method and by definition the value of GDP should be identical, irrespective of the method used.
  • This is because one person’s or entity’s income is another person’s spending on expenditure. For instance, what households spend in buying provisions at a local store is the shop owner’s income. Likewise, an employee’s salary is what his/her company spends.

GDP Formula

  • GDP takes into account the market value of the goods and services produced by the country in a year/quarter. The following equation is used to calculate the GDP of India-GDP = Consumption + Government spending + Investment + Net Exports (Exports and Imports)
  • Consumptions refers to the personal expenditures related to food, household, medical expenses, rent etc. Consumption is a major indicator account for 60% of the GDP.
  • Government spending means investment expenditure by the government. This includes all the expenditures made by the government in a particular year/quarter like payment of salaries, purchase of equipment for defence, spends on education, healthcare and social protection etc.
  • Investment refers to the investment of capital into various components like purchase of machinery and equipment, software, expenditure on buying goods and services. However, it includes investment in financial products. The indicator accounts for 32% of the GDP.
  • Net exports refer to the number of goods exported minus the number of goods imported. Imported goods must be deducted from the calculation of GDP as it may lead to calculating the foreign supply as domestic supply.

Why GDP is falling?

  • Private consumption, which contributes nearly 55-60% to India’s GDP, has been slowing down.While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.
  • Savings by household sector – which are used to extend loans for investment — have gone down from 35% (FY12) to 17.2% (FY18).Households, including MSMEs, make 23.6% of the total savings in the GDP.
  • As per government data Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy, too has declined from 34.3% in 2011 to 28.8% in 2018. Similarly, in the private sector, it has declined from 26.9% in 2011 to 21.4% in 2018.
  • Gross fixed capital formation (GFCF) refers to the net increase in physical assets (investment minus disposals). It does not account for the consumption (depreciation) of fixed capital.
  • Infrastructure Leasing & Financial Services (IL&FS) and its subsidiaries are facing liquidity crisis and has defaulted on debt repayment. The default by IL&FS has also impacted other NBFCs and also mutual fund players.
  • RBI’s Annual report highlighted that there are still structural issues in land, labour, agricultural marketing and the like that need to be addressed.
  • Demonetization contributed too much of the slowdown as the Double Whammy of demand collapsing, and supply bottlenecks mean that there is a broad slowdown across the entire value chain of the demand and supply dynamics.
  • This is the fact that most Public Sector Banks are saddled with high Non Performing Assets (NPAs) that have resulted in them tightening lending and instead, seeking deposits and otherwise repairing their balance sheets by making provisions for Bad Loans.
  • GST has hampered the small businesses more than Demonetization by forcing them to withhold inventory until they migrate to the GSTN or the GST Network and become compliant with the numerous rules and regulations that are part of this tax.

What steps should be taken by government?

  • Give auto sector incentives to invest and shift to electric vehicles and Incentives to auto sector employees to upskill on electric vehicles.
  • Change GST collection to quarterly for companies below Rs. 1 crore and reduce the GST slab rates.
  • Adopt the Direct Tax Code, cut income tax for the bottom slab. Improve credit flow to both consumer and industry.
  • Reduce real interest rates by 135 basis points as cost of capital has to come down.
  • Stimulus should drive investment, upskilling for displaced employees.
  • Factor market reforms, including bringing the cost of land down.

Conclusion

The government should give a high priority to implementing measures to bolster manufacturing output and kick-start an upturn in the investment cycle.Accelerated spending by the government is another way out but this action would be opposite to the government’s fiscal deficit target of 3.3% of GDP.India requires significant investment in infrastructure, manufacturing and agriculture for the rapid growth rates of the last fifteen to twenty years to be sustained. In order to fulfil this it needs to create a robust financial structure that can serve the needs and demands of growing nation.

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