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What Led To The GDP’s Steep Fall To 5.8%?

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What Led To The GDP’s Steep Fall To 5.8%?
Rajat Mishra - 04 June 2019

Just a few days after the Bhartiya Janta Party formed its government at the centre with a thumping majority, GDP growth slipped down to 5.8% in Q4 from 7.2 % during the same phase last year, lowest in the last five years. A data released by the Central Statistical Department showed.

Now everyone is looking up to the government and expecting that the government which consolidated its base politically during its last tenure will handle astutely, the economic challenges looming large in front of us.

But the pertinent questions that are hovering over us is that what went wrong in the last quarter that India’s GDP growth came down to 5.8%? There are multiple reasons that led the GDP growth to fall so steeply. From ongoing NBFC crisis to low Investment, from faltering manufacturing sector to the agricultural sector reeling under distress, all these factors have attributed to the fall of GDP to 5.8%. The GDP growth rate at 5.8% made India fall behind China after a year and a half, as the neighbouring nation is growing at 6.4% right now. However, irrespective of the governments projection of GDP growth rate at 7.2 per cent could not stand true in the face of multiple economic problems faced by various sectors.

The NBFC Crisis

Economic affairs secretary Subhash Chandra Garg on Friday said that the ongoing NBFC crisis is one of the reasons that attribute Q4 GDP slowdown at 5.8%. Non-Banking Financial Companies are financial institutions registered under the companies act and render banking services such as lending and depositing. NBFC is called a shadow banking system. NBFC is reeling under huge distress and they don’t have money to lend and are grappling with multiple challenges in order to raise funds. Liquidity crunch and assets and liability mismatch are the reasons for the unfolding of the NBFC crisis.

Also, IL&FS, which is India’s largest shadow bankers (NBFC), admitted to a series of defaults that brought the market closer to a crisis. And due to this many investors were struck with the fear that many more NBFC will meet the same fate and denied giving money to NBFCs.

A slowdown in Investment

Another big reason for the fall of GDP is low private and government investment. The government also restrained to invest in order to meet its fiscal deficit target. Due to this, there was a sharp fall in GFCF growth (Gross Fixed Capital Formation) that denotes net investment. With the low investment in new projects and already low private investment, the Q4 witnessed very slump investment phase in March this year. And the key reason for this is lack of funds. Due to the elections investors adopted a wait-and watch approach.

Manufacturing

Nirmala Sitharaman’s tweet about the rise in the demand of automobile shows the vibrancy and robustness of Indian economy. But the data about the decline of automobile consumption in April by the Society of Indian Automobile Manufacturers that automobile Industry witnessed a decline of 16% in sales. This was a fair proxy indicator giving a glimpse of slowdown Indian economy was witnessing. The Index of Industrial Production for the month of March, 2019 is 140.2, which is 0.1 per cent lower as compared to the month of March 2018. This shows that growth in Industrial activity came down to a 21-month low with the contraction of 0.24 per cent in March.

In terms of industries, twelve out of the twenty three industry groups in the manufacturing sector have shown negative growth during the month of March 2019 as compared to the corresponding month of the previous year.

Agricultural

Agricultural and allied activities are reeling under huge distress in India. From farmers suicide to massive protests carried out by various farmers’ bodies brought to the fore that how grave the problems of agriculture are. However, agricultural activities witnessed a contraction of 0.1% in Q4 in comparison to 2.8 per cent in the previous quarter.

Ever since the GDP growth rate is declared, unemployment data is brought to the fore, one thing that is crystal-clear is that the current regime will not have it easy to steer the government through such a challenging economic condition. And they will have to take certain immediate remedial actions in order to get the economy back on track.

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