Is this the New Normal for the Indian Economy?

From Fastest Growing to a Laggard

In recent months, the Indian Economy has been in the news for the wrong reasons. From being the fastest growing major developing country and the leader among the so-called BRICS (Brazil, Russia, India, China, and South Africa) which is the term used to refer to the Emerging Economies, it has become the laggard with growth coming in at 5.7% in the last quarter.

Indeed, growth has stagnated and stalled much before the last quarter, and some economists point to the steady decline in important parameters and indicators such as Capital Investment, Employment rates, Exports, and Savings.

While temporary blips in growth rates are par the course for any economy and particularly the Indian Economy that is more complex than its peers, the fact that the other economies in the world are “rebounding” from the financial crisis is indeed a cause for concern for Indian Policymakers since they cannot explain the slow growth in the Indian Economy to Global Headwinds.

Further, the fact that Oil Prices have been at historical lows takes away any excuse of the impact of such factors on the slow growth rates.

Moreover, with robust FDI flows (Foreign Direct Investment) into the Indian Economy, though, such investments are not impacting the real economy since private investors have been snapping up distressed assets instead of investing in real and productive sectors of the economy, there are some serious questions that need answers from the government about the causes for the slowdown and the steps that they are going to take to address the slowdown.

Good Days would Take Time to Materialize

What is galling for the Central Government is that it was elected on a promise of Good Days Ahead or Ache Din which was the slogan that caught peoples attention.

Thus, it is hard for the policymakers to explain why that has not materialized despite many reforms and other measures intended to spur the growth momentum.

Also, the twin moves of Demonetization and the introduction of the GST or the Goods and Services Tax have been said to have landed a “double whammy” to the economy thereby exacerbating the already slow pace of growth.

This means that perhaps we are heading to a New Normal scenario for the Indian Economy wherein structural reforms such as these two and other reforms would take some time to bear fruit and hence, it is better to be prepared for a prolonged slowdown.

Is this is the New Normal?

To explain, the New Normal could be that the Indian Economy clocks slower growth rates for the next few quarters or even years before robust growth returns.

The reasons for this as mentioned briefly earlier are that reforms such as Demonetization and more importantly, GST are structural in nature meaning that they impact the very foundations of the Indian Economy and hence, the results of which would take time to materialize.

Moreover, the push by the Government to reform labor and land laws are again intended to transform the basic structure of the Indian Economy and hence, success or otherwise can only be measured in the longer term.


Structural Reforms Need Patience and Realism

The point to be noted here is that the Indian Policymakers are attempting a “Behavioral Change” wherein the people are being nudged towards Digital Payments, Tax Compliance, and the move from the Informal to the Formal Economy.

In addition, by reforming the labor laws, they intend to professionalize the workings of SMEs or Small and Medium Enterprises, and by targeting the archaic land laws, they are trying to change the entire paradigm of how land is acquired for private projects.

Thus, it can be said that there is a need to wait longer before the results appear and hence, this New Normal would persist for some more time.

It is also the fact that the Indian Corporates are saddled with debt thereby precluding any impact of lower interest rates on capital spending.

In addition, most banks are stuck with high levels of NPAs or Non-Performing Assets due to the high lending during the Boom Years.

This is a classic bind where banks do not lend to corporates due to the need to deleverage and the corporates, in turn, do not invest since they use any new loans to pay off the debt that they have accumulated.

Apart from this, the fact that jobs are not being created is another headache for the Indian Policymakers since the so-called Demographic Dividend of a youthful population can turn into the Demographic Disaster or a Nightmare when there are not enough jobs.

Thus, what we have is a situation where all sectors of the Indian Economy including Agriculture are showing negative prospects for the longer term thereby decreasing the chances of the Indian Economy returning to its potential shortly.

Gird Yourself for the Longer Term

As has been mentioned throughout this article, this New Normal can indeed persist longer in the absence of any major policy reforms.

Moreover, the fact that the problems of the Indian Economy are deep-rooted and structural in nature means that quick fixes do not work.

Thus, it is better to gird oneself for the longer term challenges and prepare accordingly for a few more quarters or years of low growth.

This can take the form of investments that are spread over the longer term in addition to deciding on real estate and other forms of investment.

To conclude, while optimism is always welcome, one must also be realistic without being pessimistic which is that the New Normal is going to be with us for some more time.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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