What is a business cycle?
A business cycle refers to periods of expansion or recession. During expansions, the economy is growing. It has indicators like employment, industrial production, sales, and personal incomes. The indicators are on a rising trend. During recessions, the indicators decrease. Decreasing indicators show that the economy is contracting.
What indicates that the Indian economy currently is in a slowdown?
The country's economy is showing signs of slowdown, with hi-frequency indicators like industrial output posting subdued growth and automobile sales touching historical lows. GDP growth rates are showing decline. RBI revised its growth projections for 2019-20 down.
What can cause a cyclical slowdown?
If the slowdown is a cyclical downturn, that is short term, the factors that cause it historically have been
1. Bad weather,
2. Inflation,
3. Global upheavals,
4. Currency volatility and
5. High oil prices and so on.
While some of the above factors are still relevant for the current downturn, there is a firm opinion that the slowdown is a structural one.
Why are some saying that it could be structural?
For the first time since economic liberalisation in 1991 that the country is facing a downturn primarily led by private consumption. Housing demand has been sluggish for the past several years. Auto sales volumes saw a slowdown from the second half of 2019 and general consumption (based on volumes of consumer staple companies) from the fourth quarter of 2019.
The ongoing consumption slump in the world's fastest growing economy is a result of a combination of factors of a decline in
1. Income
2. Savings,
3. Bank deposits
4. Credit, and
5. Business confidence.
This has led to a synchronised collapse of demand in credit-driven sectors such as housing and auto and consumer non-durables.
How important is private consumption for GDP growth?
Private consumption contributes over 55%-60% to gross domestic product (GDP) and was the force behind India's rapid recovery after global turmoil during the 1997 Asian Financial Crisis and the sub prime crisis of 2008.
Indian economy is facing the sharpest decline in its savings rate in 20 years. It is about 30% of the GDP having fallen from about 38% in 2008.
Due to fiscal pressure and the possible contraction in revenues, the government can not spend beyond a point.
Is there any basic flaw with the LPG strategy that led to the structural slowdown?
The structural dimension to the stagnation and decline of our economy is explained by economist Rathin Roy as follows: Since 1991, the LPG policy focused on the upper crust of about 10% for economic growth. Rest benefited very little if at all. Thus we see inequality. Such disparities prevent demand and consumption on a wide scale. There are limits to such unequal growth and thus we are seeing a slowdown. It may stall Indian economy at a middle income level- a trap, unless, structural revival through public spending, fiscal reforms, exports and rapid roll out of universal basic income are institutionalized.