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Economic growth rate sinks to new low: why you should worry

business Updated: Aug 31, 2013 14:35 IST
HT Correspondent
HT Correspondent
Hindustan Times
economic growth

India’s economic growth rate sank to a nearly four-year-low of 4.4% in April-June this year from 4.8% in the previous quarter, proving fears of a widespread slowdown with factories producing less, companies offering fewer jobs and prices remaining high.

The government and the Reserve Bank of India (RBI), has announced a string of steps that including making loans costlier for banks, controls on foreign exchange transactions for individuals and firms and easing of foreign investment caps on several sectors such as telecommunications and defence.

Says Prime Minister Manmohan Singh: "We have the resources and the will power to get the economy back to high growth rate of 6% to 8%... Speculators are not the best judges of the health of the economy."

But how does all this affect the common man? Here is how:

* Rising prices
Rise in wholesale food prices in July, from 9.74% in June.

Sharply rising food prices have hit family budgets hard. The same amount of money now buys fewer goods. Clothing, medical care, education, travelling, communication, recreation, eating out and most services too have turned dearer over last 1 year.

* Interest rates
RBI’s repo rate — the rate at which the central bank lends to banks.

The arrest the rupee’s slide, the RBI has been forced to raise banks’ borrowing costs to curb liquidity in the system. The central bank wants to discourage banks’ lendable resources used for taking speculative positions on rupee.

* Slow investment
Of India’s GDP, the gross fixed capital formation, a measure of investment activity, lower than 33.6% last year.

Costly borrowings and inputs have dampened investments as firms defer capacity expansion plans. Companies have also pruned wage bills, resulting in lower salary hikes.

* Plunging rupee
Drop in the rupee’s value in last one year.

As foreign investors pull out from Indian markets sensing a rollback of the US monetary policy, the rupee has slid. A fall in the rupee’s value makes imported raw materials and overseas loans costlier, hitting companies further.

* Fiscal stress
Growth in consumer, social and personal services output, a proxy for measuring govt expenditure, in April-June 2013, compared with 8.9% last year.

Sluggish industrial growth has led to deceleration in the broader economy, resulting in slower GDP growth.

* Weak spending
Fall in India’s consumer durables output in April-June against 8.1% growth last year.

Costly diesel will knock up the cost of ferrying goods across states and squeeze household travel budgets further. The family budget will take another hit on a fresh round of price hikes.

Five steps to revive growth

* A gamble for growth by the RBI can be worth a try. Lowering interest rates can boost sentiments and revive investment and consumer spending.

* One of the surest ways to revive a sagging economy is to prompt households to spend more by giving more money in people’s hands throughtax breaks.

* Reforms in agriculture sector urgently. A third of fruits and vegetables rot because there is no storage. At least 25% more farmland can be irrigated if infrastructure is built.

* A goods and services tax (GST) that stitches a common national market can save billions of dollars by replacing a web of levies such as excise and octroi with a single tax.

* It’s critical to catalyse large scale industrialisation across India. Projects like the 1,483-km long Delhi-Mumbai Industrial Corridor can spin millions of jobs.