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?