Why India's economic growth has slowed

India's economy is showing signs of slowdown, with hi-frequency indicators like industrial output posting subdued growth and automobile sales touching historical lows.

Illustration: Uttam Ghosh/Rediff.com

The current economic slowdown can be attributed to a combination of structural and cyclical factors, in addition to global uncertainties, an SBI study said on Wednesday.

The country's economy is showing signs of slowdown, with hi-frequency indicators like industrial output posting subdued growth and automobile sales touching historical lows.

"The reasons for the current domestic slowdown, apart from the global uncertainties look like a combination of both structural and cyclical factors," SBI said in its research report 'Ecowrap'.

It said there are clearly a host of structural factors that are holding back current consumption.

A substantial decline in wage growth (both rural and urban wages) in recent times resulting in lower household savings (a result of conscious policy decisions to correct macro imbalances) has possibly slowed down the growth in real per capita income that is holding back demand, it said.

The share of private sector has declined from 50 per cent during 2007-14 period to 30 per cent during 2015-19 in new project investments (in value terms).

A possible increase in current capacity utilisation (at 76.1 per cent) can happen only if the sector-specific issues are simultaneously addressed to boost demand of bank credit, the report said.

On automobile sector slowdown, Ecowrap said it is not restricted just to India, but the impact is felt across geographies with China also facing the brunt of the auto slowdown.

Even in the US, after a long period of auto sector sluggishness, the July numbers gave some respite but that also may be an impact of the base effect.

In Germany too, the auto sector witnessed a production decline of 12 per cent in the first half of the year.

"The criticality of automobile sector can be gauged by a humongous 30 million employment on a per annum basis which it generates.

“Out of this more than 50 per cent could be of contractual nature, hence the seriousness of the current auto slowdown," it said.

Referring to the external environment, it said the global economy is currently in uncharted territory.

The assumptions which "we hold for reasonably predicting the future" do not seem to be holding up and the global economy is witnessing outlier events on a daily basis, the occurrence probability of which is practically non-existent given the assumptions.

For example, it said Argentina's stock market declined by 38 per cent in a single day, the largest one-day decline in its history.

Independent observers suggest that this was a 17-sigma event, which means that it should not have happened even once in the history of the universe, the report noted.