What is Actually Up with the Economy | GDP FALLS TO 4.5%, but it's okay and this is why

It’s the beginning of the month, you’ve just earned your first salary, and out of that you want to buy something really nice for your girlfriend, you go to the closest makeup shop (hint for boyfriends: JUST buy them makeup at any given time) and buy her favourite eyeshadow palette for ₹2000. The shopkeeper who loves his beer goes to a liquor shop and buys a beer worth ₹700. The liquor shop owner who’s cheat day was finally here, decided to treat himself with a large extra cheesy pizza for ₹400. This money is finally used by the swiggy guy who's decided to open a savings account and put his money there.

So, basically what happened here was that the initial ₹2000 that was spent, has generated ₹3100 worth of economic activity. The initial ₹2000, contributed ₹3100 to the Indian Gross Domestic Product (GDP). This wouldn’t have happened if like the last Swiggy guy, we all would have deposited our money into the banks, or kept it in our very own pockets.

As John Lanchester writes in How to Speak Money: “GDP can be thought of as a measure not so much of size… It measures the movement of money through and around the economy; it measures activity." One man’s spending should be another man’s income.

Coming to the topic at hand, it is exactly this activity which has slowed down in India. The GDP growth from January to March 2019 slowed down to 5.8%, and in this quarter it has shown a drastic downfall to 4.5%. Yep, that’s right 4.5%

There were, of course, many reasons which led to this downfall, but the main reasons were Demonetization, the introduction of Goods & Service Tax (GST) and increase in the Non-Performing Assets (NPA). India has really been growing at its slowest pace in 6 years, and that’s not any good, especially since our beloved Narendra Modi has promised us a 5 trillion dollar economy.

Don’t rub your eyes, you read it absolutely right, 5 trillion.

This isn’t even the interesting part, the interesting part is the government being in absolute denial about the whole thing. In one of the 1000 videos that I watched on this, one of a Bhartiya Janta Party (BJP) representative said that the economy is bad all around the world, and that when Congress was in charge we were way worse off.

See, don’t get me wrong, it’s not like the government isn’t trying. Government spending is definitely rising. They’ve injected over 10 million dollars into the economy and cut the interest rates 4 times this year. There are talks of 10 state-owned banks merging into 4 so that the lending capacity increases. But none of this is helping, clearly. World bank has even pushed India down by 2 ranks in the GDP index, and the sales have dropped by 30%

Besides these factors, there are various economic indicators which tell us the state of private consumption expenditure, investment, government expenditure and net exports, which in turn forms the GDP. Let’s look at a few of those indicators, and finally talk about what’s actually happening to our country.

Real Estate

As per Liases Foras, a real estate research company, India’s top 30 cities had 1.32 million unsold housing units as of November 2019, a jump of 9.5% from March 2018. This means that builders are building new houses at a faster pace than people are buying them.

Private consumption

It is 3.1 %, while in June it was 7%. This means that money that is coming back in the economy is very less. This point is further proved as the number of packs sold, of fast-moving consumer goods (FMCG) companies have slowed down over the last one year. If we look at Hindustan Unilever Ltd, the volume growth between April and June 2019 was at 5%. It was 12% during the same period last year. Britannia was down to 6% against 13% last year. 

The numbers are absolutely overwhelming. But wait, there’s more! (Didn’t mean for that to sound enthusiastic, my bad)

Investment

Fresh investments are very important for the GDP of any economy to keep growing, for the simple reason that they create new jobs, which in turn leads to higher incomes and higher spending, creating economic growth. Many foreign investors are pulling out money leading to high volatility. 

Let’s speed up this process,

Agriculture is down by 5%

Electricity is down by 12.4%

Crude oil down by 5.1%

Natural gas  is down by 5.7%

Steel production is down by 1.6%

Rural wages by 1.6%

I could go on and on...

So, the question here is, is our economy in a freefall? Will the GDP just keep going down, or will our Government be able to come to the rescue or will we be saying hello to our old enemy, Recession?

But In the blog title, you must have noticed that I said this is okay. Allow me to tell you why.

Recession is not because of ill spending by the government, it is because of the reconstruction of the economy.

The process of reconstruction means things like demonetization and GST. 

From having to file 17 or more returns, it has now come up to 1. Which means that there is uniformity of tax. Earlier, if the tax in West Bengal was 20% and in Bihar, it was 6%, the person would send his goods to Bihar and bill it from there, which of course made it easier for us financially, but this was not good for the economy.

So basically, the economy is not doing good at the moment,  because of reconstruction. And it is gearing up the people to please change their cultures and habits so that they can sustain for a longer period of time at that growth rate.

Think about it, It is very difficult to manage a 30 people company, it is tougher to manage a 30,000 people company by corporates, even after so many corporate laws there are still scams happening there. Just imagine, ruling a country of 1.43 billion people. You can’t have it right all the time. 

There is no model that we can follow. We don’t work on dictatorship like China, we are a democracy. So the government has to keep on experimenting and try out new things. And while they’re experimenting some plans will fall into place and some won’t. They implement it and learn from their mistakes.

The problem is that people, like us, don’t want to change our methods of working. Because in the last 20 years people have been working in a certain way, and now that the environment is changing, people don’t want to change so we’re crying and cribbing about the economy.

Yes, there is less money.

Yes the banks have become tight, but they’re becoming tight for a reason, otherwise, they were given to the likes of people like Vijay Malaya, who was fleecing money and scouting the laws.

It is not that this government is bad, or that they’re performing badly.

Now, the future of the world is digitization, and that’s exactly what the government is trying to do.

Whenever there is a cultural shift, there is turmoil but India is only passing through the turmoil. But the cultural shift is necessary for us to sustain for the next 20 years.

If the entire world is moving towards a cashless economy and digitization, and India stays the same and doesn’t grow, then how will we compete globally?

So, to sum this up, yes the GDP is falling, but it will be okay.