Economic Slowdown In India | Types of Economic States

When India’s Economic Slowdown Will End?

Introduction

In this article, we are going to discuss the current economic slowdown in India and the different types of economic states in detail.

Which economic state currently India is going through, is Indian economy is heading towards recession? what lies ahead? Let us try answer all these questions here. Also, let us discuss the historical economic cycles Indian economy has gone through and how the market cycle is related to the economic cycles. You can also check out our Economic Indicators monthly report with all the latest stats and analysis – https://investyadnya.in/books/india-economic-indicators-report-&-analysis

Economic Slowdown In India | What Lies Ahead ?

Types of Economic States

• There are 4 economic states :
  1. Economic Slowdown
  2. Economic Boom
  3. Peak
  4. Stagflation
• There are 2 important factors which plays a key role in determination of economic state :
  1. Growth
  2. Inflation
• The above 4 states depend upon range within which the growth and inflation percentage lies.

Let us discuss each of the above mentioned 4 economic states one by one.

1. Economic Slowdown

• In this type of economic state, both Inflation as well as GDP growth rate are low. (GDP – Gross Domestic Product)
• In Indian context,
  • Low Inflation is 3-4%
  • Low GDP Growth rate is 5-6%
• The current state of Indian economy is low inflation and low economic growth. As we can see, in June-2019 quarter, India’s GDP growth rate has come down to 5% from 5.8% in March-2019 quarter. It means India is currently going through an economic slowdown.
• On the other hand, Recession means the contraction of GDP of the economy, where GDP growth rate is negative.

2. Economic Boom

• Economic Boom is the situation where GDP growth rate is high, but inflation is on lower side.
• In Indian context,
  • Low Inflation is 3-4%
  • High GDP Growth rate is 8-9%
• This is a very unique situation, where performance of the economy is magnificent. Here, overall market sentiment as well as performance is very good.

3. Peak

• Economic Peak is the economic state where an euphoric valuations enters into the market. Here, there is high inflation and high GDP growth rate in the economy.
• In Indian context,
  • High Inflation is 7-8%
  • High GDP Growth rate is 8-9%
• During this phase, as asset prices shoot up, so caution is thrown to the wind. Market sentiments may not be rational. Investors may not behave in a sensible and a careful way, the situation where greater fool theory plays out everywhere. Valuations reach extreme levels during the peak phase.

4. Stagflation

• The forth type of economic state is known as Stagflation. In this state, inflation is on higher side, while GDP growth rate is very low.
• The term Stagflation is derived from :
  • Stagnation of economic growth and
  • Inflation on higher side
• In Indian context,
  • High Inflation is 7-8%
  • Low GDP Growth rate is 5-6%
• Stagflation is a period of rising inflation but falling output and rising unemployment. Economist term it as a stagnation state where there is a rise in inflation and a fall in the growth rate.
• The Stagnation is caused by supply-side shocks like rising oil prices, falling productivity, rise in structural unemployment etc.
• This is less damaging than higher inflation and negative growth. But, it still represents a deterioration in the trade-off between unemployment and inflation.

Historical Economic Cycles

1. Economic Slowdown (2002-03) :
   • After IT Bubble burst in 1999-2000, for the next 2 years in 2002-03, economy was going through a slowdown phase. Thus, lower inflation around 3-4% and lower GDP growth rate 5-6% was seen in 2002-03. And the same situation is there in 2019-20 also where Inflation as well as GDP growth rates are ranging in their lower side.
   • And the subsequent phase – economic boom is going to come in coming years due to various government’s and RBI’s measures to boost economic growth.
2. Economic Boom (2005-06) :
   • The period of 2005-06 is the situation of economic boom on global front and India was also indirectly connected to the same. Here, inflation was 3-4% and GDP growth was 8-9%.
3. Peak (2007-08) :
   • Here, inflation as well as GDP were on higher side. Inflation was 7-8% while GDP growth rate was 8-9%. There was a great corporate earnings. The profitability of the companies was grown at almost 15-20% YoY.
   • And thereafter, market fell after 2008 Lehman’ Crisis. Though India was not directly coupled with the worse impact of the crisis, but the dependency of Indian markets in terms of liquidity was majorly on FIIs. Due to the same reason, Indian market was also adversely affected.
4. Stagflation (2011-13) :
   • Here, GDP growth rate is lower side and inflation is on higher side. Stagflation was incurred in 2011-13.
   • There were a number of factors responsible for rising inflation. And at the same time, government was failing to boost the GDP growth rate.

Comparing Economic Slowdown in 2002-03 and 2019-20

• As we have earlier mentioned the economic condition in 2002-03 and 2019-20 seems to be the same with the lower inflation rate 3-4% and the lower GDP growth rate 5-6%.
• If we compare from the valuation side, PE ratio in 2002-03 was around 15-16, while current PE is around 25-26. PE ratio is increased due the earnings growth of about 13-15% in the absolute terms for the entire period between 2002-03 and 2019-20.
• The steady or flat trend in the Earnings per share (EPS) has contributed in the increased PE ratios of the corporates.
• The higher outflow from FIIs are partly compensated by the Domestic Institutional Investors like Mutual Funds, Insurance Companies etc. Various ETF funds have also supported the market by inducing the required liquidity in the market.
• Thus, these balancing factors were responsible for the lesser corrections seen in the markets currently.

Conclusion

• With an aim to acquire $5 Trillion economy status, India has to consistently achieve a minimum of 9%+ growth rate for next five years.
• On the other hand economic indicators reflect that the GDP growth of India has gone down to almost 5% in the first quarter of financial year 2019-20.