APART FROM THE PANDEMIC & LOCKDOWN MEASURES, THERE WERE A LOT OF OTHER FACTORS WHICH CONTRIBUTED TO INDIA'S ABYSMAL ECONOMIC DOWNTURN. HERE'S WHAT.
The coronavirus pandemic has caused havoc & disruption to the global economic system. Its tremors were felt the most in India where the one of the worst quarterly contraction was observed amongst G-20 economies.
Obviously, lock-down was a major factor for this slowdown as it led to cessation of economic activity. However there were other factors at play as well. Let's analyse them:
Pre-Covid slump
Even before the corona virus economy hit the Indian economy, the quarterly growth rates were already on a downward spiral. Certain economic policies (discussed later) had de-accelerated a rising economy. The Hindu Growth Rate seemed to be back! The reducing growth rate began since the first quarter of 18/19 & its been a downhill ride since then.
Downfall of Real estate & Automobile Sector
Ever since Demonetization & GST was rolled out, the Real Estate sector in India has been in a poor condition. It was flush with black money & illegal holdings. However DeMon reduced the circulation of black money to a certain extent. GST lead to taxes on rental leases which were previously not taxed.
India's Automobile Industry is unique in the sense that it caters to middle & lower middle economic classes as well. Hence, the performance of this sector is a good indicator of the economic activity of India's burgeoning middle class. In developing economies, the middle class are the drivers of demand. The fall in growth of automobile sector was a clear indication of the coming downward trend. The graph below shows growth rate of Automobile Sector in India. The sharp fall in 2019 portrays drop in demand.
Consumer Sentiment
I strongly believe that consumer sentiment was a major reason of this recession. Let me systematically explain it below:
Consumer sentiment (confidence in economy) falls
Demand drops
Production falls
Unemployment rises
Per Capita Income reduces
Demand falls
This vicious cycle continues if there is no government intervention or other favorable developments (a topic for another day). So this is exactly what happened in 2019 in India.
Failure of Make in India
In 2014, the Modi government tried to transform India into a global manufacturing hub. Although there was a substantial increase in Foreign Direct Investment, very few foreign companies set up base in India. This was due to confounding tax policy, difficulty in establishing business (the often touted Ease of doing business rankings were flawed as accepted by World Bank), need of substantial political maneuvering & limited skilled workforce. It also failed to materialize & actually propel industrial growth.
Lack of Multinational Companies
India has a handful of MNCs which participate in today's globalised world & have the ability to cater to global consumers. We just have to look to USA for inspiration in this regard. America has hundreds of international corporations which regularly innovate, outpace the market & have a truly global outreach.
People often undermine the impact businesses, whether MSMEs or MNCs have on the economy. The power of corporate America is unseen but tremendous. Let me give you an example. In producing an iPhone, the raw materials are sourced from Brazil, the circuit boards are made in India, the phone assembled in China & the end product is shipped by an Italian company. Now it may be sold in any nation but the profit goes to America. Despite no involvement in the process, the profits go to America! That's the power of Business Economics! The industrial worker made modern Britain but the businessman made modern AMerica.
I HOPE I COULD PROVIDE YOU WITH A NEW PERSPECTIVE!
GRACIAS