Examine the causes of the economic slowdown in India.

Published: October 9, 2019

The slowdown is attributed to sluggish aggregate demand in the economy leading to a fall in production, investment, employment and income.

Causes for Slowdown

Employment Elasticity

Employment elasticity indicates the percentage of growth in employment for each 1 per cent change in growth. The employment elasticity has reduced from 0.4 per cent in the 1990s to 0.2 per cent for the five years preceding 2014 and reached a low of barely 0.1 per cent in recent years.

Capital Expenditure

The capital expenditure (capex) in the private sector has been falling for the last seven years. The capex plans of public sector enterprises are at the lowest levels in the last 14 years.

The capex of the central government has come down to 2.4 per cent from 3 per cent between 2013-14 to 2018-19.

Government Expenditure

The expenditure by the central government as a percentage of GDP has been falling for the last four years. It declined from 13.3 per cent in 2013-14 to 12.2 per cent in 2018-19.

Agri Crisis

While 44 per cent of the labour force is engaged in agriculture, its share in the GDP is merely 15 per cent and is declining faster than the fall in their proportion of the labour force employed in the sector.

The exit of labour from agriculture could have been a positive step towards industrialisation. But, unfortunately, people are dropping out due to deep economic distress, and not for gainful alternative employment.

This has resulted in two disturbing consequences:

  • First, there is a substantial rise in the rate of open unemployment; and
  • Second, a large segment of the population, particularly women, are dropping out of the labour force.

The exit of labourers from agriculture has also resulted in the decline of the labour force participation rate of women to 23 per cent in 2018 from 42 per cent in 2011.

Informalisation and Contractualisation of WorkForce

Except for those in the top layer in the IT and finance sectors, the bargaining power of the working class has been falling over the past two decades due to lax enforcement of labour laws, leading to the informalisation and contractualisation of almost 80 per cent of employment in the formal sector.

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