India is facing serious economic crisis due to futile demonetization and faulty introduction of Goods and Services Tax (GST). The government and the reconstituted NITI Ayog and the economic advisers of the Prime Minister are clueless how to face the situation which is now out of their control. The recent State bank of India research report candidly said that the “economic slowdown is real, not just technical”. In fact it is not ‘slowdown’ it is ‘deep crisis’.
India’s GDP growth has slumped to a three-year low of 5.7 percent in the first quarter of the current fiscal year. The unemployment rate remains stubbornly high. The growth rate of the industrial sector has hit rock bottom at 1.61%, agriculture sector at 2.34% and the service sector is at 8.72%. Adding fuel to the fire, with demonetization and GST, consumer demand is fast dwindling, which has a negative impact on the real estate and consumer goods sectors. The ‘Make in India’ slogan and the announcement of doubling the farmer’s income have yielded no result so far and remain mere rhetoric.
Poor macroeconomic management, both by the Reserve Bank and political regimes over the past several years, is leading India towards an imminent vicious cycle of low growth and high inflation, making it exceedingly vulnerable to emerging domestic and geopolitical risks. The low growth-high inflation scenario will lead to higher fiscal and current account deficits, consequent capital outflows, a weaker currency and a lack of confidence in the economy among investors.
Economic growth in India has likely been lower than the 7% rate that has been estimated by the Central Statistical Authority for the past two-three years. A sustained 7% gross domestic product (GDP) growth has been inconsistent with other major indicators, including credit, investment, index of industrial production, and exports growth slowing for at least the past four years. A slower 5.7% official GDP growth in 2QFY18 is therefore not surprising. It is imperative to mention here that the growth figure is based on new methodology of calculating GDP. If it was calculated by old method of 2014, the growth rate would be only 3.4%.
The inexplicably tight monetary policy of high interest rates and overvalued exchange rate have been damaging to the economy. The insistence of the Reserve Bank of India (RBI) to engage in foreign exchange market intervention to maintain an overvalued currency has encouraged further volatile debt inflows. This has increased India’s external vulnerability and inhibited financial markets development. At the same time, the deteriorating economic situation would lead to capital outflows, slowing the economy further, draining liquidity from the system and raising interest rates, further dampening economic growth.