Multiple factors causing GDP slide

There are many factors, both manmade and natural, contributing to a slower GDP, be it the lack of or ineffective government measures, natural disasters, populist measures like farm loan waivers, poor production and demand levels or tighter tax enforcement. But each of us too can have a role in raising the GDP of the nation

On the economic front, it is disappointing for India that the GDP growth for the quarter ending September 2019 has slipped to 4.5%. The GDP growth in the preceding quarter was 5%. The decline in the GDP has resulted in serious debates, both within the country and abroad that India is no longer the fastest growing major economy. People are now doubting the resolve of the government that by the year 2024, India will become a $5 trillion economy. Before we proceed further, let us refresh ourselves as to what GDP means.

What is GDP?

GDP (Gross Domestic Product) is a monetary measure of the market value of all the final goods and services produced in a specific time period, often annually and sometimes quarterly. The modern concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934. In this report, however, Kuznets warned against its use as a measure of welfare.

After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country’s economy. Then, Gross National Product (GNP) was the preferable estimate, which differed from GDP in the sense that it measured the production by a country’s citizens at home and abroad, rather than its ‘resident institutional units’. Later, the US Department of Commerce, under Milton Gilbert, embedded the concept of GDP with government institutions. Now, virtually all countries consider GDP as an economic ba-rometer, though the methods of calculation differ.

India’s Central Statistics Office (CSO) calculates the GDP and it is done through two different methods: one based on economic activity (at factory cost) and the second on expenditure (at market price). The factory cost method assesses the performance of eight different industries, while the expenditure based method indicates how different are the areas of the economy, such as trade investment and personal consumption are doing. The eight sectors under the factory cost method, where the net change in value in a specified time period is evaluated are:

• Agriculture, forestry and fishing
• Mining and quarrying
• Manufacturing
• Electricity, gas and water supply
• Construction
• Trade, hotels, transport and communication
• Financing, insurance, real estate and business services
• Community social and personal services

‘The Central Statistics Office (CSO) calculates the GDP. It is done through two different methods: one based on economic activity (at factory cost) and the second on expenditure (at market price). The factory cost method assesses the performance of eight different industries, while the expenditure based method indicates how different areas of the economy, such as trade investment and personal consumption are doing’

Definite slowdown

Economists are analysing the performance in each area to explain the steep fall in our GDP. In six out of the eight areas noted above, there are contractions. We have to accept the reality that our economy has slowed down. It is apparent that there is a composite failure of all stakeholders. There is no need for a blame game. We have to diagnose the problem and come up with a solution.

The falling of growth in GDP means that there is retardation in the production of goods and services. Who created these goods and services? It is we all Indians. In specific terms, it includes our private sector, public sector, central government, state governments, our institutions and all entities.

Private sector role pivotal

The role of the private sector becomes pivotal as its contribution to GDP is roughly around 60%. GDP will definitely contract if our private sector stops growing. The sad truth is that our private sector in the last few years is not growing as per our expectations. One reason is the lack of growing demand from our domestic market while the export market remains stagnant. Production is always linked with consumption and if the lat-ter falls, the former gets affected. Economists say that consumers have less money in their hands and hence the falling consumption. Droughts and floods in several parts of the country have deeply affected our rural economy and so a large proportion of our population is affected.

NPA fallout

The other very important reason for the slow-down is that there is a problem on the credit front. Our industries are not getting money as per their requirements. Banks have been facing the problem of mounting NPAs (Non-Performing Assets) and as a result, they have become extremely cautious in fresh lending. The IL&FS scam, where a huge sum of money is involved, has further complicated the situation. NPAs have to be provided in the accounts by banks, which have resulted in huge losses. The credit squeeze by the banks, particularly public sector banks, is because of these losses and thus not having enough space for more lending. Many senior executives of banks are living in an atmosphere of fear as enforcement agencies and vigilance departments have initiated action against them. This fear has also crippled new lendings.

Lower credit appetite

The IBC (Insolvency and Bankruptcy Code), which is a recent legislation and which has been hailed as a good measure to solve the problem of mounting NPAs of banks, has also become a reason for lesser credit off-take by the private sector. Earlier, the promoters of the companies used to go for lavish loans and were not worried even if there were defaults in repayments. Now under IBC, the promoters can lose their companies within quick stipulated time if loans are not repaid on time. This has happened in the case of Essar Steel. For promoters of companies, the fear of losing their created entities stops them from taking risks in setting up new units. Business is taking risks and it cannot expand unless risks are taken. Hence, despite interest rates coming down, there is no corresponding off-take of credit.

Recently, one leading industrialist openly said that Indian businessmen remain in a state of fear and that they do not speak their minds. They hesitate to criticise the policies of the government. The industrialist, however, did not illustrate his stand. If the main contributors to the country’s economy and its GDP are not happy, then certainly it will have an adverse effect.

‘The role of the private sector becomes pivotal as its contribution to GDP is roughly around 60%. GDP will definitely contract if our private sector stops growing. The sad truth is that our private sector in the last few years is not growing as per our expectations’

Vigilant enforcement

In the recent years, enforcement agencies such as the income tax department and CBI have become more active in their fight against black money. All business people are not dishonest and they do not appreciate these aggressive policies of the government. The government has realised this fact and revenue officers have been advised to keep a people friendly approach. The need of the hour is to send dishonest people to jail and honest wealth creators to be encouraged and respected by the government and society.

Govt. role

The Government of India is another big stakeholder in GDP and its growth. It has a dual role. Firstly, it has to act as an efficient facilitator for the ease of doing business and secondly, it has to put more money into the system, like, in development works, so that more money reaches many hands and thus increases demand. On clear scrutiny of the role of the government, it cannot be denied that the ease of doing business has significantly improved in the last five years as per the index of the World Bank. However, more is desired, particularly in the fields of labour laws and land acquisition laws.

As per the latest data, the government has put more money in development works compared to earlier years and it is this segment which has improved by 11%, while there are contractions in other segments. We have to be realistic here, as the government cannot go beyond a limit, as there is not enough fiscal space and a wider fiscal deficit will boomerang on the economy.

GST angst

While reviewing the role of the central government, however, it cannot escape the criticism of the bad implementation of GST. The revenue collection from GST has gone down by a big margin for the current year. The loss is expected to be to the tune of about Rs.2 lakh crores. This adds to the already strained fiscal space. The economy cannot grow if the government has less money in its kitty to spend. Taxpayers criticise that GST procedures are clumsy while the government has stated that there has been a well planned tax evasion.

GST is a good legislation in theory and each government tried to bring it in the past 15 years but could not succeed as state governments did not come on board. The present government could bring in new legislation after promising compensation for the loss of revenue to state governments. GST is good as it stops the cascading effect of multiple taxations and thus consumers benefit. But it appears that no one is happy. The central government has to revise the GST in the present form. A robust tax system is a must for an improved GDP.

Role of states

The state governments are also big stakeholders of our economic growth. The GDP of the country cannot grow to the desired level if states do not contribute to the increased production of goods and services. It is very unfortunate but it is true that presently many states are engaged in populist measures to win elections and not in development works. For example, agriculture which is a state subject, has to be improved and farmers’ income increased by improving agricultural infrastructure.

These days, there is fierce competition amongst states for loan waivers, instead of helping farmers to increase their income by putting in place more facilities for improved agriculture and better yield. Agriculture accounts for 17% of our GDP and for an improved GDP, the income of farmers has to increase in a short period. Loan waivers do not help the economy on the contrary, they harm the economy as taxpayers’ money is used for unproductive work. State governments have also to play the role of facilitators for the ease of doing business by tweaking unfriendly state laws and also by providing amenities for doing business. The central and state government have to stand together to help the economy to g row.

Lastly, we all Indians probably are not doing enough to help the country grow. Each individual has to do something productive as the same will add up to increase goods and services for the country. We are a country of about 135 crore In-dians and even a small contribution from each of us will help.