Big picture is a red flag on a black Friday: GDP slips to 4.5% in second quarter 

It may not be implosion as yet, but the Indian economy is headed for trouble. The GDP growth rate has now collapsed to 4.5% per cent and what is worse is that the government continues to live in denial, clueless about how we got here or how are we going to get out of the mess.

According to the data announced on Friday, GDP growth has now slipped to 4.5%, from 5% in the previous quarter, the lowest in 26 quarters or six and a half years. The growth figure for Q2 in the last fiscal was 7.2%, indicating a fall of nearly 3% over the last year. While details are awaited, it is time to look at the big picture.

The big picture on Black Friday looks Red. Not only has growth has slipped to 4.5%, we have crossed the fiscal deficit target in October and latest data suggests output of eight core industries contracted by 5.8% in October.

Here is what is causing the problem: The government claims India grew at 7.5% during Modi 1, NSSO data says consumption fell by 3.7%. Put these two numbers together and you get the full picture- India’s growth under this govt its hurting people. It was only a matter of time before it damaged the fundamentals of the economy.

Now it has.

The government has gone on into denial on the NSSO figures. We have already crossed the fiscal deficit targets for this fiscal year and we are headed for serious trouble in the coming days.

Considering the broader trajectory of growth, the figures released by the government on Friday don’t surprise anyone. It was going to happen and nothing on the horizon tells us that things are going to get better anytime soon. Unless people have more money to spend and consumption increases, we are not going to see an economic revival. It is as simple as that.

The storm clouds had been gathering in the distance for a long-time but data now indicates that we are in the middle of a near-perfect storm. Automobile sales continued to struggle, consumer demand continues to be sluggish and the worst fears came true when the Core Sector showed its worst performance in 14 years, recording a negative growth 5.2 per cent in September.

While the government would like us to believe that this is a passing shower and the economy would be back on its feet in no time, data indicates that this is part of long term negative spiral. While unemployment is at a 45-year high, sustained rural distress has impacted consumption. Consumption has declined for the first time in 40 years, perhaps indicating that there is a directional flaw in the policy.

The leaked NSSO report indicated that average monthly expenditure fell from ₹1,501 in 2011-12 to ₹1,446 in 2017-18[1], a fall of nearly 4%. Since the GDP has been growing at a healthy rate through This comes at a time when the GDP has been growing at a healthy rate and hence proving a long-contested point- the benefits of growth are not reaching the average Indian, adding credence to the growing income and wealth disparity in the country.

This indicates that not only is a disproportionate share of new wealth landing up with the top 1% of the population, but the purchasing power of the bottom 99% is also shrinking. Add inflation to it and you realize that actual consumption is being impacted.

Trouble in the economy has been brewing for a considerable period of time and the government has failed to diagnose the problem, mainly because it was politically inconvenient to do so. Once the wrong diagnosis was made, it was only expected to get worse as the government went into the wrong line of treatment. In an economy that was struggling with demand, the government decided to continue with its ‘trickle down’ economics. It brought down Corporate tax rates from 30 per cent to 22 per cent in the hope that it would revive investments but with demand down, capacity expansion is the last thing on people’s mind.

The impact of the government’s policies is now visible in government revenue collections. Direct Tax collections fell short of targets by ₹82,000 in the last financial year and the move to cut Corporate Tax would lead to a tax shortfall of ₹1.45 lakh crore.[2] For a government that is surviving on a ₹1.76 lakh crore bailout from the RBI, this cut means the government would either have to borrow more to keep afloat or worse, it would have cut expenditure, which could only add to the economic woes faced by the economy.

First, the government has to acknowledge that we have hit a crisis. Then, a deep rethink is needed on the way we are going to respond to this. Denial is a luxury that the government does not have anymore.

The government would now have to look at ways to revive demand. Since the government has already overshot the Fiscal Deficit targets, it does not have any space at all. Whoever thought that a ₹ 1.45 lakh crore Corporate Tax break at this stage was a good idea was either a novice at economics or was an undercover political operative, wanting to hurt the government.

The Finance Minister should consider taking a holiday as she would have little to do over the next few months. She has already spent whatever money the government had, and tax collections are going to be below expectations in the coming months.  Things are not going to get any better in the coming days.

Maybe, she can start planning for the next year.