Monday, October 21, 2019

Causes and the Nature of the Slowdown in the Indian Economy

Contrary to many, Indian economy is not in the grips of contraction but slowdown. However there are a few optimists who may have luxury to suggest it as cooling or correction in the economy. There are enough and strong indicators clearly indicating that there is slowdown in the economic activities (Upadhyay, 2019). For any economy the cost of slowdown is always very high and the highest for the people at the margins and medium, small and micro enterprises (MSME) and informal sector. The present tide of slowdown is hurting the most to the people at the margin as they have lost their sources of income.

Everything looked so good a few years back on paper. There was relatively an assuring stable economy with financial sector in good shape. Besides a few none has predicted a slowdown in the economy (Upadhyay, 2015). This fact makes its very important for the economists to figure out the causes of this slowdown so as it is not repeated in future. So what could be the possible causes of this slowdown in the economy? Perhaps every economist would agree that the reasons for this slowdown are none but the unplanned and hasty structural reforms that had been carried out in the economy in last few years (RBI, 2019). This acceptance itself raises a number of questions whether these reforms are good or bad for the economy in long term? 

In last few years, Indian economy has witnessed a number of structural reforms taking place. Government implemented Real Estate (Regulation and Development) Act 2016, Insolvency and Bankruptcy Code 2016, demonetization in 2016 and GST in 2017. Along with these measures, Reserve Bank of India started cleaning the accumulated and ignored issue of NPA of the banking sector and NBFCs during this period. At the same time National Green Tribunal banned many real estate projects. These strong doses of reforms and cleaning up of economic system without any gestation period for the structural adjustments altogether made things difficult and hard for the economy.

The slowdown in the economy has hit the MSMEs and informal sector the hardest along with the rural economy. The cause for this is mostly the flawed GST coupled with demonetization. When these two key reforms were implemented at the same time there was already an agrarian crisis at its peak. Prior to GST implementation, most of the MSME were flourishing. Because of the flaws in tax structure most of these MSMEs had luxury to remain out of the tax network. Hence these were used for tax evasion by large numbers of organizations. But after implementation of GST, these units are facing difficult times. These are required to turn into tax complaint units so the buyers/clients of these units can avail Input Tax Credit. This has turned the whole business model followed by MSMEs unviable. Apart from these, there are many lapses, confusions and imperfection in the present structure of GST which are eventually discouraging economic activities.

After banking reforms in India, private players had started intensifying their business activities in the banking sector and as a result, money started chasing businesses. It was expected that the healthy competition would turn the public sector banks more efficient and effective in capital allocation. But it was used to fuel and fortify the unhealthy lending practices that had been followed by the public sector banks for years under political pressures. PSU banks started sub-lending to either unviable projects or dubious borrowers. As a result, NPA in banking sector reached to its highest level in last few decades (The Hindu, 2016). In case of PSU banks, the situations were even worse. Even the government owned NBFCs like ILFS were operating in the notorious way and ended up with huge NPA.

The NPA crisis in the banking and financial sector forced RBI to start cleaning NPA from the books by tighten grip on these firms which started yielding results later (ET, 2019). Banks and NBFCs were forced to recognise NPAs than hiding through capital restructuring. As a result of actions such as PCA by RBI (BS, 2018), the availability of funds in the market went down significantly. Banks started extending debt to prime borrowers and in this process MSMEs have be causalities. On overall it has hit the market negatively hence discouraging economic activities.

Because of inefficient mechanism to deal with NPA, it was found that many companies wilfully defaulted on servicing the debt and a large number of firms were found to simply siphoning away the borrowed money. This situation forced the government to come up with Insolvency and Bankruptcy Code 2016 which gave unprecedented power as well as authority to NCLT. The defaulting firms now don’t have the luxury to continuing their businesses without paying to banks and financial institutions. Rather they have to pay and bring down the level debt in the firm or lose control over the firm. This left the private sector with lesser amount of money for investment. This one unexpected move hit hard to those business houses most which were in habit of misusing borrowed funds to start new ventures (siphoning away) often for personal gains. Bhushan Steel, Essar Steel, Videocon, Reliance ADAG and Jet Airways are some examples.

Real Estate (Regulation and Development) Act 2016 was implemented on 1st May 2016. This single Act completely changed the real estate industry forever. Small real estate firms were forced to shut the businesses as they did not have luxury to use the advances from the customers for another project or different purpose. Also delaying on deliveries has penalties under RERA. In the meantime the NGT found many real estate projects environmentally unsuitable and illegal. Hence, it stopped those projects making many real estate companies bankrupt. As a result of these, the real estate industry is going through consolidation phase. Today in all the large urban centres there are a number of pending projects and there is no certainty about those projects. This has slowed down the growth in the real estate industry making large number of semi-skilled and unskilled labourers unemployed.

Since 2016 there had been so many reforms along with actions by the regulatory bodies like RBI and NGT in Indian economy. These have completely changed the structure of the economy. Most importantly, most of these reforms were implemented in 2016 like shock treatments, giving very little gestation period to the firms and economy to adjust to the new realities. After demonetization when the firms were coming back in normal course of business, on 1st July 2017 GST was implemented initially to create confusion and complexity in form of changing tax rates and filing process. These events increased pressure to businesses leading to fissure in the whole economy.

Reforms are always good for any economy as these are meant for but the end results depend on the implementation and execution. In case of India, reforms were carried out with right intentions to increase economic activities and clean-up and plug-in different structural imperfections which have crept in overtime and had been unattended for long. However it is well known fact that every change in structure requires some gestation time to adjust before things return to normalcy and Indian economy was not an exception to this. But the way just in few quarters, these structural changes have been introduced; it seems that the government was in haste. Also the way these changes were implemented it indicates that there was hardly any well planned execution strategy; a clear sign of gross mismanagement of economic affairs.


  • BS. (2018, December 28). All 11 banks under PCA show lower NPA growth in FY18, reports RBI . Retrieved from Business Standard: 
  • ET. (2019, July 25). Gross NPAs of public sector banks have declined by over Rs 89,000 cr till March: Govt. Retrieved from The Economic Times: 
  • RBI. (2019). Annual Report for 2018-19. Mumbai, India. 
  • The Hindu. (2016, November 21). Details of NPA figures of public, private sector banks . Retrieved from The Hindu: 
  • Upadhyay, R. K. (2015, July 21). Another Economic Crisis in Few Years May Not Be A Surprise . Retrieved from The Deliberation : 
  • Upadhyay, R. K. (2019, August 25). Slowdown Creeps in Indian Economy. Retrieved from The Deliberation: 

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