Posted in: Market News
Published:
December 7, 2019 9:00 AM UTC

Growth Recession Chokes India as GDP Tumbles, and No One Seems to Care

India's GDP growth fell to a six-year low in Q2, but the country's government is in denial while the economy reels under a recession.

  • India’s GDP growth fell to just 4.5% in the second fiscal quarter.
  • GDP is expanding at the slowest pace in six years.
  • The government’s steps to revive flagging economic growth might not be enough.

For long, India has been billed as the next big growth story thanks to its young (and sizable) population, skilled labor, and a fast-growing economy. Big multinational companies have poured billions of dollars into India’s economy over the years in a bid to capture the potential growth. But a series of missteps in recent times have knocked the wind out of the Indian economy’s sails and put it on a downward slope. This is clearly evident from the country’s latest gross domestic product (GDP) numbers.

India’s GDP growth down big time

India’s economy grew just 4.5% in the second quarter of 2019. This is the slowest pace of growth of the last six years. What’s alarming is that India’s GDP numbers have been consistently declining for the past few quarters.

India’s GDP growth rate has decelerated remarkably over the past few quarters. | Source: TradingEconomics

Still, the Indian government believes that the country is not in the midst of a recession.

Finance minister Nirmala Sitharaman had this to say in the Upper House of the country’s Parliament:

If you are looking at the economy with a discerning view, you see that growth may have come down but it is not a recession yet, it will not be a recession ever.

But from a technical standpoint, it cannot be denied that India is in the midst of a recession right now. According to the National Bureau of Economic Research (NBER) (via Forbes), a recession is:

A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

But it has been more than a few months since the decline in India’s GDP set in, as evident from the chart above. So, the GDP indicator clearly indicates that there is a recession in India even though the government might not admit it. What’s more, the slowdown in India’s GDP growth is not the only indicator of a recession.

Don’t ignore these red flags

India’s latest GDP numbers were released along with a cluster of other government data that seem to reinforce recessionary headwinds in the country.

India’s core sector output declined 5.8% in September following October’s 5.2% drop. The core sector includes eight critical industries such as natural gas, coal, cement, steel, refinery products, crude oil, fertilizers, and electricity. Barring refinery products and fertilizers, all other sectors witnessed substantial contraction in October.

Meanwhile, India’s Index of Industrial Production (IIP) has declined for two consecutive months. The reading fell 4.3% in September, which was the lowest since April 2012. Alarmingly, the September decline was far greater than the 1.4% fall seen in August.

On the other hand, India’s unemployment rate surged to 8.5% in October, the highest  in over three years and a stark jump from September’s 7.2% reading. Given India’s weak GDP growth, it won’t be surprising to see a rise in the unemployment rate. The country reportedly needs to grow between 8% and 10% a year to create enough jobs for the millions who join the workforce each year, according to economist Arvind Panagariya.

But that looks like a far-fetched dream right now. The government doesn’t seem to be in a mood to acknowledge a recession and the steps that have been taken of late might not be enough as the luster of Prime Minister Modi’s landslide election victory wanes off.

Making the wrong moves

Finance minister Sitharaman tried to give India’s economy a boost recently by cutting the corporate tax rate. The government probably believes that doing so will encourage companies to spur investments and hopefully lead to job creation.

But the problem lies elsewhere. Consumer confidence in India has declined sharply this year.

Consumer confidence in India has plunged of late. | Source: TradingEconomics

On the other hand, India’s consumer spending fell for the first time in four decades during 2017-18. It won’t be surprising to see spending fall further given rising unemployment, weak manufacturing, low auto sales, and the declining GDP growth rate.

Now, the Indian government decided to give out corporate sops and restructure banks in a hope to jump-start economic growth. But one shouldn’t forget that over 85% of India’s GDP is driven by the informal sector, according to the country’s Economic Survey. An informal sector is the part of the economy that is neither taxed nor monitored by government in any effective way.

According to the International Labour Organization (ILO), 81% of India’s workforce is employed in the informal sector. The organized sector accounts for only 6.5% of the total workforce. So the steps announced by the Indian government to boost the formal sector aren’t going to prop up the country’s GDP rate anytime soon.

This article was edited by Sam Bourgi.

Last modified: January 22, 2020 11:41 PM UTC

Harsh Chauhan @techjunk13

Harsh has been covering financial markets on CCN since 2019. He has also written for other reputed publications such as The Motley Fool, TheStreet, and Seeking Alpha, and gets regularly featured on Yahoo! Finance. Harsh is based out of Indore, India. You can follow him on Twitter @techjunk13 or email him at harsh.chauhan(at)outlook.com.

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