Current Economic Scenario
On Friday, 30th August, India's GDP data revealed a growth rate of 5% for Q1, the lowest in the last 25 quarters. This news has created significant concern among the public. However, this decline didn't happen overnight. We had hints of this crash when India slipped to the 7th position among growing economies.
Expert Opinions and Lack of Solutions
Amidst various expert opinions, mostly critical, few have suggested alternatives or measures for the Government to prevent further collapse. If the Government doesn't take corrective measures, we might see an economic crash in the next quarters, likely by December onwards.
Long-Term and Short-Term Effects
Economics is a subject that rarely yields immediate outcomes. Current situations are the result of long-term detrimental yet short-term beneficial policies formulated during the 2008 recession, along with some incorrect priorities and policies of the current government.
Background: The 2008 Recession
When Dr. Manmohan Singh was Prime Minister and an economist, the global recession hit. To cope, certain measures were taken, like providing additional funds to banks to liquefy the frozen cash flow. Banks started giving loans at cheap rates without much security, leading to rising NPAs when loans weren't returned.
The Modi Government is somewhat repeating this by providing funds to banks, but through the Government instead of the RBI, and by merging banks to prevent further damage. This is a band-aid solution that won't show immediate effects for the next 2–3 years. We might also see more bank fraud cases, previously unreported to showcase a healthy banking sector.
Fiscal Deficit Concerns
The fiscal deficit is another critical issue. During the 2008 recession and post-2008, the government didn't aim to lower the fiscal deficit until 2011-12, when it dropped to 4.9% from 6.6%. After 2014, the government set a goal of 3.5%, and it is now around 3.39%. However, maintaining this for FY 2019-20 is challenging, as 77% of the target has been reached in just four months, leaving six tough months for the remaining 23%.
Disturbed Demand and Supply Chain
The real problem lies in the disturbed demand and supply chain. Demand is falling, affecting supply as people save money due to various uncertainties.
National Uncertainties
- Policy Reversals: Government U-turns on policies, like the announcement and subsequent withdrawal of electric vehicles, create uncertainty. A government with a majority should have a clear vision.
- ₹5 Trillion Economy Goal: The goal requires around 14.2% GDP growth per quarter, which is unrealistic in the current global environment. Achieving this needs a bold, knowledgeable Finance Minister with a broad vision, which we currently lack.
- Finance Ministry Leadership: Nirmala Sitharaman's leadership of the Finance Ministry is questionable. The FM role is critical and needs someone with experience or expertise. She needs to be reassigned to a different ministry.
Global Uncertainties
- Global Trade War: The global trade war, primarily involving China, Pakistan, North Korea, and the USA, adds to recession fears. Market fluctuations caused by unpredictable actions, like Trump's tweets, create instability, discouraging investment.
- Dollar Index Impact: The uncertainties also affect the Dollar Index, and we might see the USD to INR exchange rate reach ₹74 or ₹75 in the upcoming days.
- India-Pakistan Tensions: Tensions between India and Pakistan, along with China's involvement, create an unstable environment for foreign investors. Easing FDI restrictions in India could help attract more investment.
Conclusion
I don't foresee significant changes in the next six months. The situation is likely to worsen, leading to more market uncertainty, increased savings, and reduced spending, which are precursors to a recession. The Government must take immediate preventive measures to stabilize the economy and restore confidence.