In recent past India has witnessed various economic slowdowns followed by recoveries in different forms. They say “Falling is just another way of Flying”. But this time it seems to be different from the past. The distinguishing factor is in terms of Longevity.  The present slowdown is more prolonged than any other previous episodes of the slowdown in terms of growth rates. The economic growth has hit the bottom of the sea and has started to grow its roots there without bouncing back. Let’s find out what could be the driving factors of the present phases of economic slowdown?

 Present Episode of Economic Slowdown:

Decade back, India was the shining star in the global economy with annual growth of around 8% to 9% in 2002-03. The slowdown in 2011-12 and 2012-13 was followed by a recovery path in the year 2013-14 and 2016-17. But this was just a temporary halt in the slowdown process. This brief recovery was soon followed by the present phase of an economic slowdown since 2017-18. The driving factors which contributed to this longevity are:

  • The recovery in 2016-17 triggered the increase in the import-GDP ratio. The import cost touched the skies due to the rise in crude oil prices. The soaring up of Import prices and weak global demand further worsen the condition.
  • The growth of the export market in India was also depressing. Fall in output demand forced the investors to cut back their investments in the corporate sector.
  • The debt payment commitment of corporate was rising because of the huge pile of debt stacked up since 2011-12.
  • The non-repayment by the corporate sector affected its creditors mainly NBFCs and Banks. There were constant defaults and write-offs in the balance sheet of lending institutions. The majority of liability of banks comes from deposits while NBFCs are non-deposit taking institutions. Their liability constitutes debt instruments. Basically NBFCs lend for a longer period and borrowed for a shorter span of time. This mismatch triggered many NBFCs to default. In order to curb the mismatch, they started squeezing their balance sheet from the asset side as well. This impacted the firms which were heavily dependent on credit from NBFC. It adversely affected the industrial credit, retail, and automobile sector.

Hence one factor led to other factors and finally led us to enter into the present era of slowdown which is driven by low demand-side factors and economic fragility both pushing each other ahead. Having secured the highest number in elections, the Modi government is now struggling with low numbers in the GDP growth rate. The government’s focus so far has been on increasing the credit supply rather than focusing on increasing the demand across the country.

The concerning factor is the present state of economy consisting of Agrarian crisis, Labor crisis, Denial of a facelift by consumption and demand-side factors, the low spirit of investors. Business after Business is reporting losses, retrenchment, and downed shutters.

How fragile the economy is?

The Indian economy that was once a benchmark for other countries is now struggling hard to breathe properly. The economy is shaken by macroeconomic imbalances and structural fragilities. The pandemic has wide opened all the cracks.

Big Businesses which are considered as “Too big too fail” are highly debt-laden. Low investment, low infrastructure, lack of capital, lack of skilled workforce and lack of technological expertise are the driving factors. The public sector should deliver but they are unable to do so because they are largely owned by the government which lacks both the expertise and motivation to run them.

Given the nature of the unprecedented crisis, only unusual steps could pull us back into the game. Some sacrifices and decisive policy actions could help us secure our future. We just can’t repair the old cracks. Now it’s high time to get a new bull run.

With each passing day, the stress is building up. Low factory output means people earning less and holding back their consumption. This has a multifold effect on the economy. Banks are also reluctant in lending fresh new credit because the earlier NPAs are eating up the capital from their balance sheet. In order for India to get back on its feet, the key focus area should be infrastructure, education, investment climate, and agriculture. Agriculture and associated supply chains should revive back because they hold a sustainable stake in the total GDP of the country.


So far the strategy has been to try relaxing the solvency condition by pushing more rate cuts and moving down on the road of fragility by liquidity injection and lax resolution mechanism for NPAs. They are waiting for the high tides to get back on its course. But the uncertainty lies on the part that what those waves would take back along with them. Once they recede then only we can see the damage caused by them.

 This sticky policy regime could halt the further decline in output growth by resolving the issues of credit crunch and balance sheet crisis. What it can’t do is picking up the output growth. The Indian economy needs a change in its policy regime because the present environment is very fragile and vulnerable in nature. In order for the economy to revive back, it has become important to stitch the torn fabric of trust and confidence of people towards institutions. From past experience, we can certainly draw a lesson that it often takes one big unprecedented, and unseen crisis to bring out the new policy regime and reforms.