Are We Heading Towards A Financial Meltdown?

In April this year, International Monetary Funds Chief Economist Gita Gopinath raised concerns over India’s GDP calculation. This was done after 108 economists including former Governor of the RBI, Raghuram Rajan raised concerned over India’s growth rate.

India’s economy is mainly a consumer economy, and in the last 6 months it has been noted that sales growth and demand of key sectors that include fast-moving consumer goods(FMCG) and automobiles industries has been on a decline. According to Nielsen data report, FMCG sector has seen a slowdown of 13.6 percent in the first three months of 2019.

In the month of January 2019, National Sample Survey Organisation (NSSO) of India had leaked data on unemployment, which said that unemployment is at 45 years high. Rathin Roy, who is a member of the Prime Minister Economic Advisory Council, recently in a interview, warned that India is heading for a ‘structural crisis’ if the demand of the top 100 million or so people who sit on top of the socio-economic pyramid has began to exhaust itself.

He explains that this slowdown in consumer demand is an early warning and India will be a middle income country with large number of people living in poverty.In other words, we will not become China or South Korea, we will become Brazil, and South Africa with rise in crime. He carries on to explain that if a country once get into middle-income trap, it is hard for it to get out of it.

According to a report of the statistical department of government of India, the Gross Fixed Capital Formation(GFCF) has been stagnant or on a decline for the last 10 years which means that fewer corporates are investing in the Indian economy through setting up industries or expanding existing capacities in the industries set up by them. This is an indication of the perception of the state of the economy and how it will pan out in the coming years.

Looking at the balance sheet of the economy, we find that fiscal deficit is on a increase which in layman’s language means that, our expenditure has far exceeded our revenue. For example, if we look at exports, they have been stagnating in a trap between 300-350 billion dollars in the last 5-7 years, and imports have far exceeded exports. This means that negative balance of trade position. One of the reasons assigned to this negative balance of trade is that enough homework has not been done with regards to the free trade agreements. As a result, imports from countries with whom we have agreements are more after the agreements, and have been detrimental to our own exports.

Therefore, whoever makes the government on 23^rd May 2019 will get a broken and very weak economy. As we wait for election results, question rises in the mind of the people, can we recover from this financial meltdown? With right policies in place, and government not fabricating data and keeping employment in mind and creating an atmosphere of investment in the country, India can come out of economic distress.

During the meltdown of 2008-2009, exports contributed to 22-25 percent to the India’s GDP and the employment it generated in labour extensive sectors of micro, small and medium enterprises, textiles, pharmaceuticals and handicrafts etc. was substantive. In fact, exports is the second-largest employer after agriculture in the Indian economy. Therefore, an emphasis has to be given to exports keeping this narrative of employment in mind.

By reassessing and revisiting trade agreements; government not taking any nee-jerk decisions such as demonetization and it’s likes, and an special emphasis on job creation for the masses, the revival of the economy can be envisaged.