Impact of Declining GDP growth on Indian Economy

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A Dismal GDP Growth Rate Scenario

The quarter ended March 2012 was not good for India, as during this period India saw a huge fall in its GDP growth rate from 9.2% to 5.3% from the previous year. It was considered to be the lowest since 2003, when a 3.6% GDP growth rate was recorded by Thomson Reuters. Again in the last quarter of 2008, during the credit crunch and following recession, the GDP growth rate of India hit this mark again. We will try to discuss the details and the pitfalls of Indian economy in this article.

Because of the current global slowdown the growth recorded during the current fiscal year was a dismally low. In the first quarter of 2012, Indian economy was growing at a rate of 5.3%, which was much less than the projected figure of 6.1%. Though, the economists and the finance minister have blamed it on a poor performance in the manufacturing sector and lapse in policy reforms.

The experts also pointed out towards the similar trend to prevail in the near future. This figure also pointed out that the GDP growth rate was at a record low during the last eight successive quarters and in the first quarter of 2012, the GDP growth rate hit an extreme low in the previous 13 quarters.

Bleakest Financial Growth in the Entire Decade

The current figure of GDP growth rate was recorded to be the same as what it was in December 2009, immediately after the global recession started. It also touched the lowest growth rate since 2002, when the world was caught in the war against terror followed by a global recession. It was also the steepest fall from the previous financial year, when it was a whopping 8.4%.

Key Factors responsible for GDP Rate fall

So, the key factors responsible for sluggish GDP growth rate are:
1. Global economic slowdown
2. Poor performance and incompetence of manufacturing sector
3. Rising inflation and poor domestic demand
4. Sluggish demand for Indian textiles abroad
5. Policy inertia of the government
6. Lack of skilled manpower in India
7. Inadequate infrastructure
8. Competition from China affecting many exporting units
9. Increased subsidies and protection

Impact of Declining GDP growth on Indian Economy

Effect on Sensex and Nifty
Following the news of a slower performance of Indian economy in the first quarter of 2012, the BSE Sensex along with Nifty also tumbled sharply. It is because of the fact that economic growth is directly linked to the corporate profits and any adverse effect on the economic performance has direct bearing upon the corporate performance. The way the BSE and Nifty fell, shows that the investor confidence took a nosedive, when the news of lowest GDP growth rate in the entire decade flashed on the news channels.

Adverse Effect on Agricultural Growth

The agriculture sector, which is thought to be India's largest sector as far as number of people involved is concerned, showed a dismal growth of 1.7% as compared to 7.5% during the previous financial year. This could pronounce a negative impact on the rural household income and resulted fall in consumption. It is directly responsible for the growth of leading Indian companies in the sectors such as auto, FMCG, food processing, fertilizers, construction and building material etc. A negative growth in the farm sector means corresponding fall in the rural purchasing power. Since the rural population in India is around 70% of the total population, any adverse impact on its purchasing power directly results in the loss of profit for the corporate sector.

Severe Impact on Manufacturing and Services Sector

A poor GDP growth is because of a very poor performance in the manufacturing and services sector. It was recorded at an all-time low of 1.9% as compared to 7.9% the previous year, which is an extremely bad performance. Exports are also impacted because of it, but it is largely due to the global slowdown and fall in international demand. The domestic issues are higher interest rates and political inertia.

How to Overcome Decline in GDP growth rate

A huge fiscal deficit, increased subsidies, policy paralysis of Indian government and falling Indian rupee are the domestic reasons of a huge decline in the GDP growth rate this fiscal year, along with the global slowdown. To recover from it, the government needs to take the following steps:

1. To cut subsidies on fuel, fertilizer and food
2. To open Indian markets for foreign retail chains
3. Immediate control on inflation
4. To curtail government expenditure on unnecessary ventures such as proposed Mars Mission and expensive military purchases etc.
5. Help small industries increase their competence both in terms of ultimate cost and quality to compete with China
6. Investment into R&D
7. Huge investment into infrastructure specially highways, industrial zones and urban infrastructure

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Last Updated on 08/31/2012