What’s Making India’s GDP Go Down from 6.1% to 5%?

The GDP growth forecast for the second quarter may further be reduced to 4.2% on the back of decreased auto sales, reduced air traffic, diminishing growth in the core sectors, and fading infra investments. As per a report by the State Bank of India (SBI), the FY20 growth forecast has fallen to 5% from 6.1%. 

Even before SBI, the Reserve Bank of India (RBI) and global agencies such as OECD, World Bank, International Monetary Fund, and ADB had downgraded India’s growth rate for FY20. In the first quarter, the Indian GDP grew at 5%, which happens to be its slowest growth in six years. 

Despite tremendous advancements in technology and industrialisation, India is still an agriculture dominated country. Agriculture contributes about 17% to India’s GDP, and more than 50% of the Indian population is employed in agricultural activities. With these staggering numbers, it is safe to say that agriculture is still the backbone of the Indian economy.

Agricultural activities in India still heavily rely on the monsoon. If there is any shortage or delay in the monsoon, then production in the farming sector takes a significant hit. However, this year, India received above-normal rainfall in the monsoon season and resulted in the flooding of many states.

The excessive rainfall harmed the Kharif crops in the states of Karnataka, Madhya Pradesh, Punjab, Maharashtra, and Gujarat. About 45% of the soybean produces have been affected in Madhya Pradesh, around 35% of groundnut and cotton crops in Gujarat were affected.  With so many agriculture dominated states being affected, the overall agricultural produces of the country has gone down, which directly impacts the Indian GDP. 

Also Read: How GDP Growth Could Be Recovered with Sectoral Solutions

Another critical factor affecting the GDP is how the GST implementation was done. The businesses are finding difficulty in getting their GST filing and refunds processed, and this has resulted in a significant sum of the enterprised getting stuck with the government. 

This, in turn, has hampered the growth, expansion, and profitability of businesses as the resources available with them is very limited. Also, the traders are demanding the government to levy GST when the payments are received. Currently, the traders are to account for GST the moment they raise an invoice. However, the amount will be settled on a later date by most large consumers. 

The banking sector is not performing well of late. The overall non-performing assets (NPAs) are on the rise, which has hampered the revenues of the state-run banks. This had made banks to be more stringent on their loan eligibility criteria and has made it hard for the new borrowers to avail loans and thus struggling to raise capital for their growth and expansion.

The auto sales have plummetted to record levels over the last few months. The automobile manufacturers were expecting some favourable amendments in the 37th GST Council meeting but were let down by the government. The consumption has gone down by record levels, and the auto sector is the worst hit. 

The domestic factors alone are not responsible for the downslide in India’s GDP. Global factors such as the Sino-Americal trade war, global economic slowdown, unrest in Hong Kong, a slump in the Chinese yuan, and uncertainty in the BREXIT have also played a significant role in affecting the Indian GDP. 

The government is working towards fixing the underlying issues. The government has merged several state-run banks to keep the NPAs as low as possible. Apart from that, the government is looking at strategic disinvestment in the public sector undertaking (PSUs) companies to reduce losses.

For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in

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