Market Watch
Policy

Five reasons why our economy is slowing down

 We've got it for youAgencies
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We've got it for you
Rating agency Crisil on Thursday lowered the gross domestic product (GDP) growth forecast by 20 basis points to 6.9% for 2019-20, citing weak monsoon and slowing global growth. This is marginally higher than the 6.8% GDP growth last fiscal, but lower than the 14-year average of 7%. Here’s a look at the reasons for the slowdown:
Jolt of reformsAgencies
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Jolt of reforms
Demonetisation that happened in November 2016, dealt a severe blow to consumption, leading to a vicious cycle of job loss and lower income, which led to further drop in demand (what economists call the multiplier effect). Next shock came in the form of a reform — when GST was rolled out in July 2017. This had a knock out effect on exports growth in the year of implementation because of delay in refunds to exporters.

Just as the effects of DeMo & GST were petering out, the IL&FS crisis triggered the Non Banking Financial Companies' (NBFC) credit crunch in 2018. By 2018-end, weakening global trade and GDP growth, led by US- China tariff wars, had caught up, amplifying the impact.
Tight monetary and fiscal policiesAgencies
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Tight monetary and fiscal policies
Since 2016-17, the monetary policy was focused on inflation control, which ensured interest rates remained hard. The combined fiscal deficit of the Centre and the state was high. And the government committed to lowering its fiscal deficit, left little wiggle room for government to increase its spending to pump-prime the economy.
Global headwindsAgencies
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Global headwinds
With the US-China trade war, global sentiments have remained poor, making the prospects of an export led growth bleak. Add to that, a looming Brexit with its pioneer Boris Johnson now the PM of UK. All this made the economic outlook appear bleak.

Crude prices favoured Modi in the first three years of his first term, but prices have firmed up after that, putting inflationary pressure.
Financial sectors sill in a messAgencies
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Financial sectors sill in a mess
The NPA ratio worsened throughout the UPA-II term and is still quite high. But no sooner did the NPA ratio start improving in fiscal 2019, the NBFC stress started building up. Stress in NBFCs percolates faster than public banks, because of its greater interconnectedness to mutual funds, banks, and corporate sector.
 Farmer's empty pocketsAgencies
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Farmer's empty pockets
Non-food inflation continued to surpass food inflation in the past two years, amounting to income transfers from rural to urban areas. Farm income could get a leg-up from the government’s income transfer scheme, and a rise in food prices would boost the terms of trade, which could make things better in the second half of this fiscal.

According to Ashu Suyash, managing director and CEO, CRISIL, "Given the crosswinds, the sops announced so far might not be enough to pitchfork growth in this fiscal to, or above, the past 14-year average of 7% per annum. Policy action looks more attuned to consumption than investment demand, which means consumption will be the first to ascend as the tide turns."
All this resulted in slow private consumptionAgencies
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All this resulted in slow private consumption
Data from ICRA too shows that seven out of 16 key segments such as, auto production, Coal India Limited’s (CIL’s) output, thermal electricity generation, non-oil exports, port cargo traffic, rail freight, passengers carried by domestic airlines, as well as ATF and diesel consumption, contracted in the last one year.
No longer no.5Agencies
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No longer no.5
The sluggish economy means India is no longer the fifth largest economy in the world. According to World Bank data, the UK and France have grown faster (in dollar terms) to march ahead of India in 2018. One reason for that is the way Indian rupee has moved against the dollar.
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