India is one of the world’s fasting growing
economies. It had been touted as an economic and geopolitical counterweight to
China. But recently its growth fell to its slowest pace in six years. Investment has
weakened, and unemployment has risen. So what’s causing the slowdown,
and how can it be reversed? Since the turn of the century, India’s
economy has grown at a rapid rate, helping transform
the country. Between 2006 and 2016, rising incomes lifted
271 million people out of poverty, meaning the proportion of Indians
still living in poverty has fallen dramatically,
from around 55% to 28%. Access to electricity has also improved. In
2007 just 70% of the population had access to power. By 2017,
that grew to nearly 93%. More recently, the Indian government constructed
around 110 million toilets — a huge step towards better sanitation designed to prevent
the practice of open defecation. It’s a signature program of Prime Minister Narendra Modi,
known as Swachh Bharat, or Clean India. All this development has been supported by
a booming economy, but as of late, that expansion has begun to run out of steam. In the third
quarter of 2019, India’s economic output grew by 4.5% – making it the first time the
country’s growth dipped below 5% since 2013. For context, 4.5% growth is still much higher
than that of developed economies like the U.S. But with 12 million Indians entering the
workforce every year, economists say the country needs annual growth
rates to stay above nine percent to ensure there
are enough jobs. So, what’s causing
this recent slowdown? Well, government officials argue turbulence
in international financial markets is at fault. Political uncertainty and U.S.-China trade tensions 
mean confidence levels among investors and consumers
everywhere have sunk. The United Nations has even warned
that a global recession in 2020 is now a ”clear
and present danger.“ But back to India – many
economists say the country’s growth problems are
actually self-inflicted. One obvious culprit is the
shadow banking sector. During the 2000s, India saw an investment
boom. It was fuelled by state banks dishing out a load of loans for big infrastructure
projects. But some of the companies taking advantage of these loans couldn’t keep up
with the repayments. That meant the state banks weren’t getting paid back and
therefore struggled to give out new loans. To keep business moving, shadow banks stepped
in. These financial institutions, which operate like ordinary commercial banks but don’t
follow traditional banking rules, eventually made up an estimated third
of all new loans nationwide. The loans played a pivotal role for the millions
of small businesses and consumers who would otherwise have no
access to credit. But in 2018, shadow banking giant Infrastructure
Leasing & Financial Services, defaulted on its debt repayments. Its collapse sent shockwaves
through the economy and shook up more traditional banks that had
supported the sector. This had a ripple effect. It became harder
for people to buy expensive items like cars. That hurt India’s automotive industry,
which is one of the country’s biggest. It employs about 35 million people and makes
up about 7% of India’s GDP. Last summer, the industry suffered its worst sales performance
in nearly 19 years, and reports suggest tens of thousands of workers
have been laid off. The agriculture and construction sectors have also
been hurting, with small and medium businesses being hit
the hardest. The country’s unemployment rate has been
on an overall upward trend since July 2017, rising several
percentage points to 7.7%. Higher unemployment means consumers are
buying less, leading to the unfortunate cycle of slower manufacturing, production,
investment and job creation. A survey from the Reserve Bank of India found
consumer confidence has fallen to its lowest level in five years. But Indians still have
a positive outlook for the future, with most consumers expecting to feel
more optimistic in a year. However, if things don’t improve, debt could
become another issue. Expecting better days ahead, many households have continued to spend,
by taking out loans and dipping into savings. Household savings as a proportion of GDP has
fallen from 23.6% to 17.2%. Meanwhile, household debt has surged to 10.9%
during the same period. Critics say the government in New Delhi has
failed to spot these risks and hasn’t done enough to get the
economy moving again. The Reserve Bank of India’s former governor
Raghuram Rajan recently blamed the lack of significant reforms and a slowdown in
investments since the global financial crisis. Even the country’s chief economic
advisor recently admitted reforms are needed to make India more friendly
to investors. India has cut its corporate tax rate, but labor and land laws are still
extremely strict. He also says the country needs to become pro-market,
rather than just pro-business, to avoid costly government
bailouts of failing sectors. But not all reforms have
been good to the economy. In 2016, Prime Minister Modi tried to clamp
down on corruption, counterfeits and tax evasion by banning high value bank notes. In one night,
the cash ban made 86% of all hard currency invalid. Three years later, many analysts say
the policy disrupted the economy and failed to achieve many
of its original goals. In 2017, a new sales tax
placed small businesses under pressure and some of
them were forced to close. In mid-2019, India’s government introduced
a controversial new tax on foreign investors. Consequently, India’s stock market suffered
its worst July performance in 17 years. Just one month later,
the measure was scrapped. The government has now refocused its efforts
on international trade and investment, and the recent changes to the
corporate tax rate could indeed help attract businesses
and investors to India. But if the country wants to be part of the
world’s largest supply chains, it will need low and consistent tariff levels to encourage
outsiders to invest for the long term. The country’s shifting
export policy has harmed several of its largest industries,
particularly clothing. India’s share of the global apparel market has
increased only slightly in the past 20 years. And though the Indian workforce is vast, both Bangladesh and Vietnam now export more. On top of that, the country’s import tariffs
on average are much higher than the world’s biggest economies. They’re also among the
highest of the world’s emerging economies. Even U.S. President Donald Trump has called
for the country to bring down its duties. But let’s take a step back. Has India’s
growth actually slowed as much as we think? The government’s former chief
economic advisor Arvind Subramanian caused a fair bit of controversy in June 2019,
when he claimed the country’s official stats probably overstated GDP growth by 2.5% from
2011-2012 to 2016-2017. He says the bottom line is that India never recovered
from the global financial crisis. The government
denies this. But none of this has hurt
Prime Minister Modi at the polls – he won by a landslide in
the most recent election. So how will he keep his promise and double
the size of the economy by 2025? Many economists insist a well-explained
economic vision would help. As would more long-term investment, better skilled workers
and improvements to infrastructure. It may not matter who or what is to blame for India’s
recent economic challenges, but bottom line – India’s economic growth needs to bounce
back, and fast. Hi guys, thanks for watching our video. We
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thoughts on India’s economy. Comment below the video and let us know
and we’ll see you next time.