Indian economy set for the

weakest quarter of growth

The Indian economy likely expanded at its slowest pace in more than
five years in the April-June quarter, driven by weak investment
growth and sluggish demand, according to economists polled by
Reuters.
That would reinforce concerns seen in the minutes from the central
bank's August meeting, which showed policymakers were worried
about weak growth and indicated further rate cuts in the next few
months to boost the slowing economy.
The poll median showed the economy was expected to have grown at
a year-on-year pace of 5.7 per cent in the June quarter, a touch slower
than 5.8 per cent in the preceding three months. But a large minority -
about 40 per cent of nearly 65 economists - expect an expansion of 5.6
per cent or lower.
The GDP data is due to be released on Friday.
If the forecast is realised, it would be the weakest start in the first three
months of a fiscal year in seven years.
“The deceleration in growth that commenced in the second quarter of
the fiscal year ending March 2019 is likely to have continued,” said
Rini Sen, India economist at ANZ.
“A host of high-frequency indicators - consumption and investment -
have continued to weaken. The most prominent ones include auto
sales, the output of consumer durables, cement and steel production.”
Domestic passenger vehicle sales in July dived at the steepest pace in
nearly two decades and declined for the ninth straight month in July,
largely due to a liquidity crunch causing huge job cuts in the sector.
These measures, in addition to the risk of further escalation of the U.S.
and China trade war, are weighing on demand and business
confidence in India.
The median response to an extra question in the poll, which was taken
Aug. 21-26, showed the average growth rate for the current fiscal year
2019-2020 is likely to be 6.5 per cent despite a weak start. But it is a
downgrade from 6.8 per cent predicted just last month and well below
the RBI's projection of 6.9 per cent.
The RBI lowered its outlook for the fiscal year 2019-2020 at its
August meeting. It has cut a total of 110 basis points in the repo rate
since February, which includes an unconventional cut of 35 basis
points earlier this month to 5.40 per cent.
But with inflation not expected to rise anytime soon, the central bank
will likely ease its benchmark rate by 25 basis points again to 5.15 per
cent at its October meeting, followed by a 15 basis point cut in the
first quarter of 2020, according to a separate Reuters poll.
Those cuts, in addition to a suite of recently announced fiscal
measures, could provide some cushion for the economy in coming
months.
On Friday, Finance Minister Nirmala Sitharaman announced reforms
to revive economic growth, including rolling back recent tax hikes on
foreign and domestic equity investors and several measures for
industries.
“We believe that the measures announced by the finance minister will
help to provide a fillip to credit growth, rate transmission and
improving investor sentiment,” noted economists at Morgan Stanley.
“We continue to see a slow recovery in growth, as monetary measures
will help but may not be sufficient to create a V-shaped recovery,
especially in the context of slowing global growth.”

Commentary:

The article presents a situation of Indian economy growth rate which seems to be proceeding towards a
recession. Recession is one of the major macroeconomic problem. Following the demonetization of
2016, India was expecting a temporary economic disaster. However, the same year India reached-the
decade highest-GDP growth rate at 8.7%. But the year 2017-2018, because of the shortage of money
supply, countless jobs were destroyed in the informal sector of India which accounts for more than 85%
of the total employment.7 And thus, the April-June quarter of 2019 has experienced the lowest growth
rate in the past five years and thus, is expected to have a recession in the economy. Economists expect
the growth rate to be 5.7%, which is 0.1% less than the previous quarter’s growth rate. India, a country
which manufactures several international car brands such as: Maruti Suzuki, Ashok Leyland, Hyundai,
Honda, Volkswagen, brings 2.3% of total GDP 3 from automotive companies. The deliveries of demanded
units, which is 115,957 units, were not completed by the respective manufacturers. The two wheelers
auto sales also declined 22.24%, that is 15,14,196 units, playing a crucial role in the recession. According
to economists, possible rationale of the drop are sluggish demand, weak investment and rising inflation.

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a

We have learned in our IB Economics that the Aggregate Demand is composed of consumption,
investment, government spending and net exports. So, fall in any one of these components may drive
economy towards a recession. According to the article, the probable causes for the recession in India are
low aggregate demand/ consumption and weak investment.

It can be noted from the article that there was a decline in the sales of the car in India for that particular
quarter and many before that. This downturn in manufacturing is believed to have occurred because of
the electric vehicles transition that the whole globe is passing through right now; meaning, the
employers that were employed for working with mechanical motor engines are removed from the
companies. It is estimated that more than 100000 had lost their jobs. 4

Figure showing the fall in price level due to low manufacturing

We also understand from the article that, another major issue that was hampering the Indian economy
was low investment figure-both in private and government sector. Investment has played a huge role in
Indian economy since the liberalization of 1991. The investment contribution growth fell by a 6.2%
compared to previous years.5 The short investment caused the level of infrastructure development to
stagger and thus there occurred a hesitation in creation of small businesses.
Inflation is another major contributor to the 2019 recession in India. On September, the retail inflation in
India reached the highest in the past 14 months, that is 3.99%. This is more compared to the previous
months inflation rates of 3.28% and 3.70% of July and August. 6 The inflation is believed to have occurred
only in retail market, and not wholesale market, because of the nature of the inflation. The inflation that
occurred was believed to be demand pull inflation. Due, to the immediate rise in the demand of various
food supplies in the months where India was going through a series of changing monetary policies. This
overall increased the demand chain in the market and hence there occurred an inflation, contributing to
the much-anticipated recession.

Figure showing demand push inflation

However, India is expecting to recover from this recession very soon due to the changes in policy it has
brought recently. It has focused on increasing the efficiency of agricultural sector, and is expecting to
double the farmers’ income by 2022. India has introduced a new program: MSME (micro, small and
medium enterprises). This shall uplift the local enterprises and contribute to the local market itself. All
the job cuts that India faced in the phase of recession are expected to be recovered by this program.

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