ECONOMICS CIA-3

ALINA FATIMA KHAN,

P.E.P. 2ND YEAR,
120418130029.
PROJECT ON:

ECONOMIC CRISIS
IN INDIA
TABLE OF CONTENTS
S. NO. TOPIC SLIDE NO.
1. WHAT ARE THE 4-11
CAUSES OF INDIAN
ECONOMIC CRISIS?
2. WHAT IS THE 12-15
POSITION OF THE
INDIAN ECONOMY?
3. HOW TO CONTAIN 16-20
THIS ECONOMIC
CRISIS?
WHAT ARE THE CAUSES FOR SUCH A
CRISIS?
• The Indian economy has been in doldrums since
8 pm on 8 November 2016, and the Narendra
Modi government has finally begun to admit
there’s a problem.
• The strongest admission yet came Thursday
when NITI Aayog vice-chairman Rajiv
Kumar said, “Nobody had faced this sort of
situation in the last 70 years where entire
financial system was under threat.”
• He added that the root cause of the problem lay
in the UPA-2 years: “The entire episode started
with indiscriminate lending during 2009-14
leading [to] rise in non-performing assets
(NPAs) post-2014.”

• The following are causes for the Economic Crisis

in India:
• Letting banking crisis fester:
It was only in late 2015, with then RBI governor
Raghuram Rajan’s push that the banks started
cleaning up their balance sheets, ridden by hidden
non-performing assets. The Modi government
should have seen this risk, to begin with,
and addressed the problem first thing. The bank
recapitalization that began later should have
begun much earlier too. Rajan had also sent the
PMO a list of top defaulters, but no action was
taken. Stressed with NPAs, banks reduced giving
out credit to industry, contributing to a liquidity
crunch.
• Not moving projects:
Due to the ‘policy paralysis’ of the UPA-2, a
number of infrastructure and industry projects
were stalled. Land acquisition and environmental
clearances were a major hurdle. Like a statesman,
Modi needed to get his hands dirty to clean up the
mess, get the projects going. Instead, he made it
clear his priority was politics over India’s progress
when he went back on amending the land
acquisition law. 
• Demonetization :
Instead of doing what was needed, Modi enforced
economic quackery over 1.3 billion people. This
plan to finish the black economy overnight was
supposed to mop up Rs 4-5 lakh crores, but
brought loose change. Demonetization killed the
informal economy, disrupted age-old economic
systems and caused job losses. We are still facing
its consequences and it brought no benefits at all. 
• Vilification of business:
Along with demonetization came the culture of
vilifying business. Business people were being
painted as being corrupt and Modi made them
stand in a queue. The truth is that
 everyone managed to convert their black
money into white through demonetization, but the
vilification of business for political gains further
made business reluctant to invest.
• Keeping inflation too low: 
The Modi government’s policy has been good
politics with bad economics. They have been
reluctant to put money in the hands of rural India.
Low inflation helps Modi win
elections, but it comes at the cost of reduced
purchasing power and low demand. People are
neither saving nor spending — because their
incomes aren’t going up.
• Tax terrorism:
Instead of relaxing tax rates or reforming tax laws to
make them simpler, the Modi government has come
to be known for “tax terrorism”. Once again, Indira
Gandhi would be proud. Faced with revenue shortfall
and fiscal deficit constraints, the government wants to
extract tax out of an economy that is going through a
crippling slowdown. Hence the tax terrorism.
WHAT IS THE POSITION OF THE INDIAN
ECONOMY ?
• India’s economy grew at its slowest pace in over
six years in the June quarter following a sharp
deceleration in consumer demand and tepid
investment. The government has already
announced a series of measures in the past week
as part of its efforts to put growth back on track.
• Gross domestic product (GDP) grew 5% in the
First quarter of FY20 (Financial Year, 2020), data
released by the government showed,
marking the slowest growth since the fourth
quarter of FY13. GDP growth was 8% in the year
earlier quarter and 5.8% in the preceding one.

• The slowdown in investment and consumer demand

derailed manufacturing, which grew just 0.6%. A
meager 2% rise in farm sector added to the demand
slowdown.
• The government has announced a package of
measures such as liberalizing FDI for select
sectors, ensuring flow of credit to non-banks,
rollback of a controversial tax surcharge on
foreign portfolio investors, more capital for banks
and a big-bang bank consolidation.
• Automobile sales, a barometer of the economy,
have declined sharply in recent months, forcing
production cuts and jobs losses. The government
has offered incentives on auto purchases to help
revive demand. Weak global economy and trade
tensions have kept export growth muted.
Independent experts, however, expect the
slowdown to persist for a while.
HOW TO CONTAIN THIS ECONOMIC CRISIS?

• State Bank of India (SBI) Chairman Rajnish Kumar

told several business dailies that the next two months
will be critical in terms of reviving the economy.
• While growth for the April-June quarter slumped to a
low of 5 % on weak consumer demand, Kumar hopes
that demand will pick up once the festive season kicks
in.
• He, too, like many other economists feels that strong
policy reforms are needed to tackle the slowdown,
which seems to be a mix of structural and cyclical
factors.
• Shubhada Rao, chief economist at YES BANK
told moneycontrol.com that for the supply-side
changes to yield benefits, people need to have
cash in their hands. However, the current spree
of job losses combined by record-high
unemployment rate has severely affected the
supply-demand ratio in India--a key reason
behind the economic slowdown.
• Since the real estate and construction sectors
offer employment to a large pool of people,
economists believe that the government should
introduce some temporary boosters to help the
real estate sector snap out of its weak streak.
• Many construction workers and daily wage
labourers who work in real estate have been
pushed out due to the economic slowdown.
Therefore, a large number of people are now
sitting unemployed-a key reason why demand has
fallen. Reviving demand in realty and construction
could steer the economy towards revival.

• The government has to come up with measures to

increase wage growth, which declined significantly
due to certain policy reforms aimed at correcting
macroeconomic imbalances, showed an SBI study
• This, however, is not possible without injecting
more liquidity into the system. Despite the bank
mergers and shots of recapitalization, Indian banks
are far from recovery, with non-performing assets
(NPA) close to Rs 8 lakh crore.

• The NBFC or shadow banking sector, which is a key

lender to Medium and Small Scale Enterprises
(MSMEs), is still reluctant on lending to business
as they continue to face the pangs of the liquidity
crunch. It would be almost impossible to tackle the
slowdown without reviving small scale enterprises,
which create a bulk of employment opportunities
across sectors.
• According to many economists, the government
should focus on measures that will enhance bank
and NBFC lending rather than further complicate
the situation with bank mergers.

• While the slowdown would probably continue for

the next quarter, it is high time the government
focuses on fixing the liquidity crisis, which has
choked lending to most MSMEs, and reducing the
tax burden on individuals and companies.