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India is one of the fastest growing economies in the world. It was regarded as the economic and international weight of China. But recently its growth has slowed to a very low level in six years. Investments have declined, and unemployment has soared. So what causes the decline, and how can it be reversed? Since the turn of the century, India's economy has grown at a rapid rate, helping to transform the world. Between 2006 and 2016, rising income lifted 271 million people out of poverty, meaning the number of Indians still living in poverty dropped dramatically, from 55% to 28%. Electricity supply has also improved. In 2007 only 70% of the population had access to energy.
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In 2017, that growth grew to about 93 percent. Recently, the Indian government built about 110 million toilets - a major step towards better sanitation designed to prevent the practice of defecation. It is the signing ceremony of Prime Minister Narendra Modi, better known as Swachh Bharat, or pure India. All these developments have been supported by a growing economy, but since then, such expansion has begun to weaken. In the third quarter of 2019, India's economic output grew by 4.5% - making for the first time the country's growth rate of less than 5% since 2013. Overall, growth of 4.5% is still much higher than that of developed economies such as the US, but with 12 million Indians entering the workforce every year, economists say the country needs annual growth to stay above 9 percent to ensure adequate jobs. So, what is behind this recent decline? Yes, government officials argue that there is chaos in the global financial markets. Political uncertainty and trade tensions in US-China mean levels of confidence between investors and consumers everywhere.
The United Nations has also warned that the global economic downturn by 2020 is now a "clear and present." But back in India - many economists say the country's growth problems are actually causing them. One obvious feature is the shadow banking sector. In the 2000s, India saw investboboom. It was exacerbated by state-owned banks issuing loans for major infrastructure projects. But some of the companies that make good use of these loans have not been able to keep the loans repayable. That means state banks were not being paid and as a result were struggling to get a new loan. To keep the business afloat, shadow banks intervened.
These financial institutions, operating as ordinary commercial banks but not following the traditional banking rules, eventually make up a third of all new loans across the country. Loans have played a very important role in millions of small businesses and consumers who would not have been able to access credit. But in 2018, shadow banking giant InfrastructureLeasing & Financial Services, failed to repay its debts. Its collapse has sent shockwaves through the region and has shaken many traditional banks that have supported the sector. This has had a profound effect. It was difficult for people to buy expensive things like cars. That has damaged the Indian auto industry, one of the largest in the country. It employs about 35 million people and accounts for about 7% of India's GDP. Last summer, the industry acquired its sales for nearly 19 years, with reports suggesting tens of thousands of workers being laid off.
The agricultural and construction sectors have also been hit hard, with small and medium enterprises being hit hardest. The unemployment rate has been rising sharply since July 2017, rising slightly by 7.7%. High unemployment means that consumers are buying less, leading to a negative cycle of less productivity, productivity, investment and job creation. A study from the Reserve Bank of India found that consumer confidence had plummeted in the last five years. But Indians still have a positive outlook on the future, with many consumers expecting to feel more optimistic about the year. However, if things do not improve, debt can become another problem. Looking forward to better days ahead, more households continue to spend money, on loans and savings. Family savings as part of GDP dropped from 23.6% to 17.2%. Meanwhile, the family debt has risen to 10.9% over the same period. Critics say the New Delhi government has failed to recognize these risks and has not done enough to bring the economy back on track. Former Reserve Bank of India governor Raghuram Rajan recently blamed the lack of major changes and investment delays since the global financial crisis. Even the country’s top economic adviser has recently acknowledged that reforms are needed to make India more friendly to investors. India has reduced corporate tax rates, but labor and international laws are too strict. He also said that the country needs to sell more, rather than just businesses, to avoid the costly government spending of failing sectors. But not all changes have been good for the economy.
In 2016, Prime Minister Modi tried to play a role in corruption, fraud and tax evasion by blocking high-level notes. In one night, the money ban made 86% of all hard cash out of use. Three years later, many analysts say the policy disrupted the economy and failed to achieve its many original goals. In 2017, the new sales tax put small businesses under pressure and some of them were forced to close. In mid-2019, the Indian government introduced a controversial new tax on foreign investors. As a result, the Indian stock market suffered the most in July of 17 years. Just a month later, the rate was dropped. The government is now focused on its grip on international trade and investment, and recent changes in corporate tax rates could help attract businesses and investors to India. But if the country wants to be part of the world's largest chain, it will need lower and more stable tax rates to encourage foreigners to invest in the long run.
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