The Indian GDP Fall

Gross Domestic Product is basically measure of total income of nation and output for given period of time which is usually a year. It is used by economists to measure the relative wealth and prosperity of different nations along with the measure of overall growth or decline of economy of nation. The most used way to calculate expenditure approach. Due to the slowing of GDP growth for five straight quarters, a worrisome feature of growth slowdown is that the sectors with high potential to absorb labor force have seen a sharper dip reducing growth of the employment. There have been low labor intensity and low share in overall input in most of the sectors that grew fast. This ultimately suggests that slower growth of economy could also have shaved off employment growth in the economy. In last two quarters, three sectors have grown faster than GDP, transport, trade, communication and services related to broadcasting, electricity, gas, water supply and other utilities and public administration, defense and other services.

According to Crisil, only trade, hotel and restaurants sub sector is labor intensive, requiring about six workers to produce Rs 1 million worth of output. However share of this sub sector is low at around 12. On the contrary a fast growing sector like public administration, defense and other personnel services, in spite having a larger share in output has low labor intensity of only three. While the sectors with higher labor intensity such as construction (12) and manufacturing (7) have been undershooting overall GDP growth. Crisil has shortened its fiscal 2018 growth forecast for India by 40 basis points to 7% from 7.4% earlier, after date for the first quarter, showed GDP growth at 5.7%, the slowest in the past three years.

The demonetization- driven cash crunch hurt economic growth, especially the small enterprises while the imminent rollout of the Goods and services tax (GST) spurred destocking and slowdown of production brought down manufacturing growth. The 7% growth forecast leads to GDP growth of 7.4% on average in the remaining three quarters. Crisil explained that he believes the sharp downfall in the growth in the first quarter is transitory and the economy will grind up slowly over the next few quarters as the impact of demonetization and destocking fades. The Purchasing Manager’s Index (PMI) for August already signals a pickup in manufacturing activity. The downside risk to our growth outlook is from GST implementation being more disruptive than what we anticipate. The first quarter GDP numbers released last week brought the growth concerns to fore. At 5.7% in quarter 1 fiscal 2018, real GDP growth declined for the fifth straight quarter after peaking at 9.1% in quarter 4 fiscal in 2016. It was also the slowest pace of growth since quarter 4 fiscal 2013, when growth had slumped to 4.3%. It is believed the GST related disruptions would limit the upside to growth for a few more quarters as there are uncertainties around the possibility of changes to the given tax structure, and as business adjust to this new regime. Hence the GDP forecast lowers to 7% in FYI18 on GST hiccups.

Goods and service tax has shown a well planned decline in the enterprises because it has led to the lower growth rates which can lead to better times for the world of finance in future. The government has forecasted 2016-17 growth at 7.1%. It is estimated that economic growth of India is expected to drop to 7.1%in current financial year ending March 31 compared to the 7.6 per cent last year, the indication of impact of drive of the demonetization. The estimates have been decreased in all sectors except for that of agriculture which has improved reason being the good monsoon season. The country has seen a sharp shortage of the cash due to surprise announcement of Prime Minister Sh. Narender Modi November 8, 2016 pulling India’s highest value bank notes out of the order. This move of Prime Minister Sh. Narender Modi has wiped out 86 per cent of currency of India and is targeted at stopping fraud in case of the tax, corruption and taking India towards digitization. Real GDP or Growth Domestic Product at content prices in year 2016-17 is expected to attain the level of Rs. 121.55 lakh crore, as against estimate of GDP for 2015-16 of Rs 113.50 lakh crore. The growth in GDP is likely to be 7.1 % in 2016-17 as compared to growth rate of 7.6% in the financial year 2015-16. The projections of CSO on national income are now in line with the estimates and expectations of Reserve Bank of India which also has lowered the GDP growth prospects to 7.1%. The Gross Value Added (GVA)at constant prices is likely to shoot up from Rs 104.27 lakh crore in 2015-16 to Rs 111.53 lakh crore in 2016-17. The agriculture as well as fishing is also likely to be increased by 4.1% in 2016-17 from 1.2%. On other hand mining is likely to decrease by 1.8% after having record of 7.4% in 2015-16. The growth in manufacturing is likely to decrease 7.4% from 9.3% and construction activities to 2.9% from 3.9%. GDP is measured by the expenditure approach by elements like total domestic consumption, total domestic investment expenditures, government expenditures and net exports. Using GDP as a measure of nation’s economy makes sense because it is essentially a measure of how much buying power of nation has over a given span of time. It is also used as an indicator of overall standard living of nation as it is directly proportional to it. If GDP increases, the standard of living people also increases. However GDP also undergo some disadvantage which includes that GDP does not count take in count unpaid volunteer work that people do for free. It includes the afternoon spent picking litter on roadside to millions of man hours spent on open and free source software such as Linux. In this way volunteer decreases the GDP of a nation because the work which volunteer do, might go to the paid worker. Calamities like wars or disasters can raise GDP. It is because wars need soldiers, oil spills require clean up and natural disasters need health workers, builders, doctors, constructors to manage the destructions and all manner of helping hand. Making up after wars or any other kind of disaster can lead to increase in activity of economy and in result will increase the GDP. It also does not take in account for quality of goods. Consumers can buy cheap, low quality, short lived things again and again in spite of buying expensive long lasting goods for them. By the time consumers can spend more replacing cheap goods than they would have paid while buying the thing at the first place. It would have resulted in growth of GDP as a result of waste and inefficiency.

GDP is the best indicator of the nation’s overall economic health. The decline in GDP is due to various factors one of them being the global situation in spite of being demonetization says Finance Minister Sh. Arun Jaitley. It is examined that some of the slowdown was seen even before the process of demonetization announced by our Prime Minister Sh. Narender Kumar Modi got started. Once the challenges are referred issue of bad loans in banking sector could be resolved which could encourage private sector investment. The decline of growth rate is good news of economy of India. It might not be actually a bad news for government and Indian economy. The curb of black money has been made by the demonetization in the sectors that are hit harder. Demonetization is blamed for slow down of GDP but it has actually given credence to black money. This is silver lining for Indian economy. The decrease in GDP rate might lead to an announcement of a cut in lending rates by Reserve Bank of India. Many observers can predict a boost after the roll out of Goods and Service Tax (GST) from July 1, 2017. A normal monsoon under such circumstances is likely to increase agriculture and other sectors related to the agriculture growth rate up. It is also expected that demonetization and other laws targeted at curbing of the black money, a big portion of unorganized pockets of economy will make shift to formal economy. In actual this growth rate was unexpected. Fitch cut GDP growth rate to 6.9%. HSBC predicted GDP growth rate down by 1%. This report was released after demonetization. Dr Manmohan Singh predicted 2% downfall and demonetization process was slammed by him and was called monumental mismanagement that may bring GDP down by 2%. Amartya Sen commented that demonetization was a gigantic mistake both in terms of its objective dealing with the corruption as well as objective of one rapid jump to cashless economy. It was said that there is no reason seen behind such a process and it will only have adverse effects. However some observed it to be a better plan as India can grow faster after this slow process. As per the data per capita national income during 2016-17 is likely to be Rs. 1,03,007 showing a hike of 10.04 per cent as in comparison to the Rs. 93,293 during 2015-16 with the growth rate of 7.4 per cent. Our country ranks 141st in per capita GDP with $1723 and 123rd in the per capita GDP with $6,616 as of 2016. India has achieved 6-7 per cent average GDP growth annually after economic liberisation. India’s economy has become world’s fastest growing major economy surpassing China in the financial year 2015 and 2017. The economy of India is sixth largest in the world as measured by the GDP. India has one f the fastest growing world service sectors in the whole world along with the yearly growth rate above 9% since 2001. India has also become major exporter of IT services, Business Process Outsourcing services and software. This is the fastest growing part of economy. The agriculture sector is the largest employer in India’s economy but contributes to a declining share. Over regulation of agriculture has increased costs, price risks and uncertainty and government intervention in labor, land and credit are hunting market. Infrastructure such as rural roads, electricity and outer services remain inadequate. India has an underground economy with a report of 2006 alleging India topped worldwide list of black money with almost $1456 stashed in Swiss bank. The demonetization of bank notes of 500 and 1000 notes returned the black money into the economy. In nominal data, fifteen countries have GDP above $ trillion, 62 have above $100 billion. Top five economies accounts for approx 53.82% whereas top ten accounts for approx 67.19%, top 20 economies increase up to over 80%. Another factor, PPP is used to compare economies and income of people by adjusting for difference in price of different countries. The list contains projected GDP of 191 countries in current prices of the year 2017 and 2022. GDP of Pakistan and Egypt is missing in nominal methods. Both data is calculated by interpolation. In PPP data 25 economies, in which 10 more than nominal, would have GDP above $1 trillion, 84 economies would have GDP greater than $100 billion and 181 have greater than $1 billion. Countries are sorted by GDP PPP forecast estimates from financial and statistical institutions in the limited period January-April 2017. GDP comparison using PPP are more useful than those using nominal GDP when assessing nation’s domestic market. It is because PPP takes in account the relative cost of local goods, services and inflation rates of the country. The free fall in numbers of GDP shows that the problem is more structural. The economic growth of India declined to three year low of 5.7 per cent in April- June, underscoring the disruptions caused by uncertainty related to the GST roll out amid slowing down in manufacturing activities. Investment intensive sectors have been more affected by the general slowdown and uncertain environment in 2016-2017 while consumer intensive sectors have been more affected by demonetization. Important sectors in manufacturing like capital goods, consumer goods and engineering goods have performed not so well and hence it is the cause of the concern. The rebound in GDP growth is unlikely in coming quarters if all the factors discussed above are combined collectively. It is only by the first quarter of next fiscal that growth can observe a hike provided asset resolution takes place by then. The decline in economic growth may lead to an upsurge of anger in the country.

Arun Jaitley remark came after the Reserve Bank of India said that 99% of demonetized currency came back into the system. Jaitley also insisted that money getting deposited in the bank does not mean it is all legitimate one. Indian economy is remarked to be in dense fog by Credit Suisse. The structural forms including GST have introduced significant uncertainties related to the growth, inflation, currency and banking systems in the country. However they also introduce significant uncertainty on several macro economic variables as discussed above. As per Mishra noting that markets and local economy are not always in sync, 25 per cent of BSE500 market capitalization is almost completely driven by global factors, 22 per cent by local micro economic situation, 42 per cent from penetration driven stories and 11 per cent by market share. The economy is in a period of the uncertainty and in next few months rate cuts may not take place, meaningful rate cuts of 9-12 months can be obtained. Ii is further said by Morgan Stanley that number of high frequency growth indicators is indicating that end demand is holding up well and is running counter to slowdown exhibited in national accounts. Some mark to market adjustments to its full year GDP growth has been made. According to him currency replacement programme and GST had led to the deceleration in the momentum of the growth. India is moving on to the next phase of the business cycle of productive growth- a phase marked by further improvement in growth. While macro stability remains under observation. Former RBI governor remarked that India needs to focus on the three areas – infrastructure, power and exports to increase the GDP growth. For the quarter ending June, India’s GDP growth slumped to three year low of 5.7 per cent lagging China for the second straight quarter as manufacturing slow ahead of GST launch amid the lingering effects of demonetization. If the infrastructure project be actually completed lever of government can be pushed harder. The experimentation of Prime Minister Sh. Narendra Kumar Modi has not stopped vibrant economy of India which is still the fourth fastest growing economy in the world. The economy of India has taken advantage from ongoing market reforms that have improved the spirit of competition. India scored 4.52 points out of 7 according to Global Competitiveness Report which is slightly above its ten year average of 4.33 points. It has helped India climb to raise its position of 39th most competitive nation in the world.