Growth slowdown: structural or cyclical?


Economics is infamous for the differences of opinion among its practitioners. Consensus is very rare. Interestingly, presently we have a consensus that India’s economic growth is decelerating; but there is strong disagreement on the nature of that growth deceleration and the policy initiatives needed to address the problem. From the market perspective, the important questions are: How serious is the slowdown? Is the slowdown cyclical or structural? When can we expect a recovery in the economy?

Slowdown is sharp

The slowdown is, indeed, very sharp. The FY2019 growth rate of 6.8 percent is the lowest in five years and the Q4 FY2019 growth rate of 5.8 percent is a 20-quarter low. If the Q1 FY 2020 growth rate also comes below 6 percent, which is very much likely, that would be serious deceleration. If this happens it would be the first time in seven years that two consecutive quarter GDP growth rates would be dipping below 6 percent. In such a scenario, growth revival will take time.

Is the slowdown structural or cyclical?

Cyclical downturns are normal. It has happened many times before. A simple equation in macroeconomics will help to understand the nature of the slowdown.

From the expenditure perspective GDP growth has four components: Consumption, Investment, Government Expenditure and Net Exports. This is expressed in the form of a simple equation:

GDP= C+I+G+ (x-m)

where C=Consumption expenditure, I=Investment expenditure, G= Government expenditure and (x-m) = net exports. Deceleration in growth can happen due to decline in any of the four components. Of the four components, export growth has been sluggish during the last five years. Government expenditure has been steady and growing. Consumption demand has been growing steadily, till recently. The real issue has been the steady decline in private investment. Savings and investment have been declining steadily. There are structural issues here.

Consumption slump is cyclical

Private consumption demand growth has been steady at 8 percent for the last four years. Therefore, there is nothing structural about the consumption demand decline. The sharp slump in consumption demand is a recent phenomenon, which can be traced to the NBFC crisis. Therefore, consumption slump is more cyclical.

The NPA crisis in the banking system and the Prompt Corrective Action (PCA) ordered by the RBI severely constrained many PSU banks. Problems of capital inadequacy and restraints imposed by the RBI led to sharp fall in bank lending. The consequent gap in credit growth was largely filled by the NBFCs which succeeded in raising huge capital. The share of NBFCs in total loans rose sharply from 12 percent in FY 2012 to 23 percent in FY 2019. This sustained consumption growth. But the scenario completely changed with the IL&FS default and the market soon discovered that the Asset Liability Mismatch (ALM) is a deeper problem plaguing the NBFC segment.  The problem became a major crisis with the DHFL default. With the exception of sound NBFCs, others found it difficult to raise funds and a liquidity crisis ensued. When the NBFC funds and credit dried up, it impacted consumption demand, particularly in segments like automobiles. The banking sector, stressed under huge NPAs, and witch-hunting by government agencies for laxity in lending became risk-averse and drastically cut down on lending. The slump in consumption demand is largely the consequence of this stress in the banking sector and crisis in NBFCs. This is a cyclical issue which is presently being tackled by liquidity infusion and rate cuts by the RBI. Even though the monetary transmission is weak, this monetary stimulus can be expected to produce results after a lag of two to three quarters.

Investment slowdown is structural

The prolonged private investment slowdown is largely structural. Government has been doing the heavy lifting in investment for the last few years. Presently, there is no room for fiscal stimulus since the Public Sector Borrowing Requirement (PSBR) at around 9 percent of GDP is swallowing the entire financial savings in the economy.  In all likelihood the fiscal deficit target of 3.4 percent for FY 2020 will be exceeded since the ambitious revenue targets will be missed in this phase of growth slowdown.

With poor monetary transmission and limited room for fiscal stimulus, growth revival becomes a challenging task. So, how do we revive investment and growth? How do we break the vicious cycle of low savings-low investment-low growth and move on to the virtuous cycle of high savings-high investment-high growth? There are a variety of prescriptions on how to do this. These include borrowing abroad through sovereign bonds exploiting the global low interest regime, bold moves on privatization to send clear business-friendly message, part monetization of the fiscal deficit etc. Renowned experts like Dr Rangarajan strongly argue for aggressive disinvestment and using the proceeds for capital expenditure to revive growth.

Wanted: Confidence-building measures

It is a fact that business confidence has been seriously impacted and animal spirits have taken a big knock. Policy mis-steps like the higher surcharge on FPIs registered as trusts, witch-hunting of bankers and harassment by over-zealous bureaucrats and tax personnel have all contributed to the erosion of business confidence. This is, perhaps, the most important issue that needs urgent attention and action. Confidence restoring communication from the Prime Minister himself through his interview to ET and the Independence Day address are reassuring. But the government needs to walk the talk. This government has the political space to address this issue. Will the government bite the bullet? Let’s hope for the best.


  1. Some blind persons described the elephant variously is famous. Bhaarat is growing, yes a humongous population is aspiring for manifold requirements. But a good government wanted to streamline the direction and took many steps. One is of course the demonized DEMONETIZATION. A structural change has been introduced. Formerly the growth was not in anybody’s control as a competing parallel undercover economy also was flourishing. This has been HACKED and sent to ruin. What we are seeing is the REAL economy now in BABY STEPS. You have to be patient and caring to grow, cultivate and flourish. Blaming the government is useless as WE THE PEOPLE make the government. We have high stakes both in rights and responsibilities, Om

    • The economy is in ruins. With a birdbrain in the Finance Minister’s seat we can not expect anything worthwhile. The central government resorts to looting RBI of its reserves and gives to the corporates. This government is by the corporates, of the corporates and for the corporates. They do nothing to the common man. They can do nothing. And in return, what do the corporates do? Do they invest in India? No. They invest in countries which are more investor friendly. Investment will come only if the policies are friendly, and stable. And more, investors are interested only if the economy is robust. Here, the government is building toilets. But the nation ranks at the bottom in poverty index- 102 among 117. It is simple. Only if the common man has confidence in the economic stability, he will spend. Here unemployment is growing. People are not sure, whether they will have their source of Income intact tomorrow. And the real income in the hands of the people has come down.

      As the FM is birdbrain, so are her colleagues. One Minister says, the North Indian youth fail to find employment because they are not intelligent enough. Good tribute to the donkeys who have voted them to power. Another BB Minister says, people watch movies, so there is no recession. The FM herself says, car sales is down because people use Über and Ola. Wonderful cluster of ixxxxx as ministers.

      With these people in power, one Raghuram Rajan, the Urjit Patel, then Arvind Subramaniam and lastly Viral Acharya quit their important posts in RBI or PMO, signalling undue interference. This government is ruining the economy.

  2. I am not an economist. However recently there is war on blackmoney and corruption. Money obtained by these means we’re providing steam to our economy . Naturally when these are curbed there must be slow down. Am I correct?

    • Agree with your views. I too feel that the long-term benefits from this clean-up will be substantial.

    • I beg disagree, Mr. Nambiar. The demonetisation of currencies was a Tughlaquian exercise, that claimed nearly Rs 28000 cr of our precious money from the exchequer, on various accounts. And the end result?

      Please see the following recent report:
      Despite the many an effort to shift to digital payments and usher in a digital payment economy, the currency in circulation has jumped by a hefty 17 percent to Rs 21.10 lakh crore as of March 2019, the Reserve Bank says in its annual report for 2019.

      The demand for the Rs 500 bill, which is the second highest denomination after the Rs 2,000 note, has soared the highest and now accounts for over 51 percent of the value of currency in circulation, says the report released Thursday.
      < ..

      Read more at:

  3. It is the structural flaw in the policy front that is affecting the economy. Conducive investment climate has to be created by policy initiatives. And the consumption pattern also to be addressed by building the confidence of common man in economic Stability. As unemployment is rising, people are not confident of their income stability, even their employment tomorrow. So people do not spend. And moreover, the real income in the hands of the people is dwindling.

    The Gonernment is bent upon looting the common man with 30% income tax, where as the highest tax rate for the corporates is only 22%. The Government loots RBI of is hard-preserved to give concessions to the corporates. And key economists and Finance professionals quit the Government one after the other. All these acts attack the confidence of foreign investors to make an entry in India.

    Added to this is the internal law and order situation. Controlling unrest by an iron hand is not looked upon without anxiety by the investors. Conducive investment climate needs to be created by policy stability, economic stability, good employment climate and real law order climate. India is currently wanting on all these fronts.

  4. There is definitely a slow down in the Political/Beurocratic Corruption Industry
    Heavens are not going to fall because AUDI/BMW cars are not sold
    Let the NBFC s return the borrowed money to the nationalise banks
    Everything will be OK

  5. Corruption & Black Money are siblings. They are Cancers – in our case in advanced stage. Yes,treatment will be costly & painful. I think, after the first operation, patient is weak but recovering slowly. More operations needed till the disease is totally eradicated.


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