The Impact of India’s Slowing Economy

Last year India’s growth rate slowed, resulting in India’s loss of the title of the fastest-growing economy in the world. After six straight quarters of GDP growth rate decline, India’s GDP growth hit a 6 year low of 5% in the first quarter of FY20 (April-June). This economic decline has been coupled with increasing unemployment rates, decreased international investment, and a depreciation of the rupee. While this crisis has had the largest impact on the manufacturing and automobile sector, it has had a negative impact on almost all sectors of the economy, resulting in increased unemployment and decreased consumption across the board. As Prime Minister Modi entered his second term in May, he came with promises of fixing the weakening economy through economic reform and development. However, as the end of the year approaches, many of the economic policies he has instilled have failed to decrease unemployment, increase loans, or spur investment.

Many economists believe that the start of the economic slowdown was in part due to Modi’s economic policies during his first term. The first policy Modi implemented was the demonetization policy in 2016. This policy had the goal of curbing tax evasion and corruption by introducing a new rupee note and making 86% of the cash in India void. While Sumit Agarwal, a Professor of Finance at the National University of Singapore Business School, claims this policy “effectively stimulated the transition from a cash-based to digitally enabled economy,” critics such as Sitatan Yechury, CPI(M) General Secretary, claimed that this was an “Anti-national act,” tweeting “100s died in queues...All this for what?”

In July 2017, India implemented the goods and services tax which is an indirect tax levied on the supply of goods and services. This was created with the goal of removing the cascading effect, or the tax on tax cost of goods. This act was harshly criticized, with many arguing that this tax harmed small firms and has forced hundreds of thousands out of jobs. According to the Centre for Monitoring the Indian Economy, unemployment went from 3.4% to 8.4% after the act was introduced. Even former RBI governor Raghuram Rajan claimed that “The two successive shocks demonetization and the GST had a serious impact on the growth of India.”

The Mint Macro Tracker, which tracks India’s economic momentum, dropped to an all-time low in August. Nearly 10 of the tracker’s 16 high-frequency indicators were in the red, demonstrating a further deterioration of the economy. The industrial sector, core sector, and automobile sector are all regions that have fallen into the red. The tracker’s economists claim that a “strong revival in investments and exports could help India navigate her way out of both domestic and external weakness,” however, only time will tell if any of India’s policies will lead to this.

Markets such as the textile industry, which employs 45 million, and the automobile industry, which employs 37 million, continue to suffer. According to Vindu Goel, of the New York Times, “automobile manufacturers were hit by a triple whammy: New safety and emissions standards increased the cost of vehicles, nine states raised taxes on car sales, and the banks and finance companies that fund dealers and 80 percent of consumer car purchases were paralyzed by the credit crunch.”  The Chairman of Maruti Suzuki, R.C. Bhargava, claims that this brought “a deep depression in the automobile sector.” The Auto Component Manufacturers Association of India claims that the industry could be forced to fire over a million workers in the coming months due to the recession. With sales plunging by 32 percent in August alone, the future of the automobile industry is not looking very promising.

The textile industry is also facing extreme economic decline. Although the price of cotton has decreased, the US trade war with China has caused the price of yarn to decline, resulting in fewer profits for Indian spinning mills. The owner of the textile factory Siva, V, Murgensan, even noted “it’s a buyers market,” demonstrating that if there are no consumers businesses will fail.

On September 20th, India’s finance minister Nirmala Sitharaman announced the government's plan to cut corporate tax rates from 30% to 25.17%  in an attempt to boost economic growth by increasing corporate earnings, investment, and revenue. While it is unclear what effect this increase will have, those in the finance industry are hopeful that it will result in increased revenue and improved business activities. Some are pessimistic about the effects of this cut. Economists claim that this cut, which will cost India 7% of GDP each year will not strengthen consumer demand, and will, therefore, not serve the purpose it was enacted to do.

When discussing potential solutions to problems in India’s economy, many look to the issue that is causing the economic decline. Economists argue that the main issue within India’s economy is still not being addressed: consumer demand. According to Jahangir Aziz, the head of emerging markets research at JP Morgan, “The real problem facing India is not that it is too expensive to do business but the fact that there is no demand,” he claims, “If you want to boost consumption, you reduce the price of things people are buying.” Aziz states that the best method to improve the economy would be to increase demand by lowering prices, which would be done by cutting the goods and services tax.

Whether India will adjust its policies to stimulate the demand side of the economy is unknown. Once the full impact of the corporate tax cut can be seen, there will either be increased hope for Modi’s economic policies or more distrust and a further economic decline within India.