India recorded the slowest growth rate of 5.7% during the first quarter of 2017-18. This has raised questions on the India growth story. Let us examine the reasons for the slow growth during the quarter and corrective steps which the government needs to take to make the economy grow at double digit.
The reasons for slow growth in the first quarter
One of the major reasons for the slow growth during the first quarter is demonetization. Demonetization has affected the spending of rural economy. Rural economy accounts for the maximum cash transactions and the shift to digital transactions has been slow. Meanwhile, the flow of the new currency took time. The gap created low demand for goods and services.
Another factor that led to slow GDP growth is the GST implementation. The high-level of inventory de-accumulation by the firms during the period resulted in a slowdown in industrial production. Firms were worried about the tax exemptions for goods produced for earlier period. The share of industrial sector share declined from 7.6% during first quarter of 2016-17 to 1.6% during first quarter of 2017-18.
The third factor is the appreciation of rupee during this period. This has impacted not only the export but also import.
As explained by chief economic adviser Arvind Subramanian, the government will have to address the growth issue from various fronts.
One of the major steps that can be taken by the government is to increase the rural spending. One of the leading growing markets for goods and services is the Indian rural market. Increasing rural income can be an immediate step to step up the demand and so increase manufacturing sector growth.
Increase in Investment in infrastructure and manufacturing sector and Agriculture sector reforms are few other measures that can bring back the growth to double digit.
Indian economy is still growing at high rate compared to developed economies. But it is important to achieve the full potential of growth to provide employment and better standard of living for Indians.