THE GIST of Editorial for UPSC Exams : 04 MARCH 2019 (Can the RBI’s reduction in borrowing costs help check the demand slowdown? (The Hindu)

Can the RBI’s reduction in borrowing costs help check the demand slowdown? (The Hindu)

Mains Paper 1: Economy
Prelims level: CSO
Mains level: GDP growth slowdown and its impact

Context

•  India’s economy is inarguably slowing, and the latest estimates from the Central Statistics Office disconcertingly point to a deepening slowdown.
•  GDP growth is projected to have eased to 6.6% in the October-December period.
•  The CSO now forecasting the full-year expansion at 7%, fiscal fourth-quarter growth is implicitly pegged at an even slower 6.5%.
•  At that level, growth would have slowed to a seven-quarter low, giving the incumbent NDA government its slowest pace of annual growth.

Analysing the data

•  The data clearly reflect the pain points in the real economy that have been evident for some time now.
•  For one, the farm sector continues to remain in trouble with GVA (gross value added) growth in agriculture, forestry and fishing having slowed sharply to 2.7% in the last quarter, from a 4.2% pace in July-September and 4.6% a year earlier.
•  With rabi sowing showing a shortfall across most crops after a deficient north-east monsoon, and the abiding structural issues that have pushed a multitude of farmers into acute distress nowhere near resolution, it is hard to foresee an early revival in this crucial primary sector.
•  This, in turn, continues to dog demand in the hinterland for manufactured products, from two-wheelers to tractors, and is evident in the consumption spending data.
•  Growth in private final consumption expenditure eased appreciably to 8.4%, from the second quarter’s pace of 9.8%.

Reasons behind this slowdown

•  Manufacturing is another source of concern.
•  The estimates for growth in GVA for the sector put the pace at 6.7%, weaker than the 6.9% posted in the second quarter and a rapid deceleration from the April-June period’s 12.4%.
•  The latest Index of Industrial Production (IIP) figures also give little cause for optimism as manufacturing expansion in December slowed to 2.7%, from 8.7% 12 months earlier.
•  RBI Governor Shaktikanta Das had in fact pointedly cited how “high-frequency and survey-based indicators for the manufacturing and services sectors” suggested a slowdown in the pace of activity, to help justify his vote last month for an interest rate cut to bolster growth.
•  That most of the sectors comprising the broader services basket remain becalmed adds to the sense of disquiet.
•  It remains to be seen if the RBI’s reduction in borrowing costs helps check the demand slowdown in the fourth quarter, an improvement in investment activity notwithstanding.
•  Gross fixed capital formation, the key metric for investment demand, expanded by a healthy 10.6%, building on the second quarter’s 10.2% increase.

Conclusion

•  Still, with military tensions with Pakistan on the boil, a long campaign for the general election ahead.
•  The uncertainties looming on the global trade and growth horizons, and little fiscal leeway to tease back momentum through increased spending. ]
•  The economy appears headed for a period of uncertainty at least till the next government is in place

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Prelims Questions:

Q.1) Consider the following statements regarding Asian Infrastructure Investment Bank (AIIB):
1. It is a multilateral development bank.
2. It aims to improve social and economic outcomes in Asia only.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:
Q.1) Can the RBI’s reduction in borrowing costs help check the demand slowdown?