Right now, India is facing both Structural(long term) and Cyclical Challenges(Short term). Because of this, restricting economic slowdown is challenging for the Government.

Before knowing the reasons, We have to know how GDP is calculated. The method of calculation of GDP is mentioned below.

GDP = C + G + I + NX

Where, C – Expenditure by Consumer

G – Expenditure by Government                                                                                                                             

I – Investments in the business

NX – Net Exports 

This reason is based on the paper published in Harvard University by Arvind Subramanian, Former India’s chief economic advisor and John Felman, Former IMF representative to India. 

  • One of the major reason for the current slowdown is Twin Balance Sheet(TBS) problem as explained in Economic Survey 2017-18.
  • Twin Balance Sheet refers to balance sheet of Banks and corporate secor. Here, Banks are piled up with Non performing Assets (NPA) and corporate are over borrowed from bank and not able to pay their debt.
  • This problem dates back to 2005 to 2009. This is the period when India was growing nearing double digit in GDP. At that time, companies borrowed heavily to make huge profits and the banks, especially Public sector one, lent a huge money to corporate without following prudential norms. 
  • After Global Financial Crisis in 2008, many projects of the companies are not viable and they are not able to pay their debts on time.
  • Inspite of the falldown, companies and banks are survived, because most of the banks are government owned. So, banks gave more time to pay their dues. Further, many banks lent new loans to companies.
  • In 2018, when Non-Banking Financial Companies (NBFC) crisis started and sustained non performance of real estate sector stopped the growth of the economy and GDP rates are started falling. Now, we are facing Four Balance sheet challenge in the Indian Economy.

Government has left with fewer option to invest, exports are declining due to fall in global demand, Companies are not in position to invest in the business and the consumer’s demand remains weak due to unemployment. Currently, All the components of GDP is weak. Because of these reasons, Indian economy is facing current slowdown.