Question: India’s GDP numbers have witnessed monumental fall in recent data, indicating a slowdown in coming days. Explain.
Answer: The first quarter GDP growth has witnessed a contraction of 24% from previous quarter. The Indian economy was already under stress, which was further aggravated by the nation wide lockdown that impacted economy to a large extent.
Reason for GDP fall
- Fall in consumption
The consumer behaviour of individuals have been impacted due to lockdown. Major contributors to growth such as hotels, transportation, entertainment, etc have been experiencing fall. This has shown that lower demand will result in reduced growth.
- Reduced government spending
Government spending has been minimal in order to maintain fiscal position. Slowdown in economic activity has reduced government’s tax revenue, which has forced a contractionary approach from the government. Without government’s stimulus, economy will undergo slowdown.
- Fall in exports and imports
The fall in consumer demand has reduced import of goods and services into the economy. These goods and services are important components of GDP and their fall will be indicative of slowdown. The majority of reduced imports are petroleum.
Steps to boost GDP
- Quantitative easing
In order to provide stimulus to domestic economy the government needs to reduce bottleneck for overseas money in form of FDI and FPI. RBI can also release money into the market by buying bonds.
- Reduction in tax rates
In order to change consumer behaviour towards spending, there is a need to increase the amount of disposable income in hands of consumers. This can be achieved through reducing taxes, increasing subsidies for major spending etc.
- Expansionary monetary policies
Expansionary monetary policy can be initiated by RBI through reduction of repo rate, reducing reverse repo rate, reducing SLR and CRR. RBI can also preform action such as Long term repo operations and initiate Operation Twist to reduce government deficit.