On the questions of are we going through a cyclical slowdown or a structural slowdown, Kotak replied, “We got to be clear. We are going through a cleansing and a purging process. Business in India happened in a particular manner for a long time and the rules of the game were different. The rules of the game have changed. Business, in general, has taken a little longer time to recognise the new rules of the game and it is moving towards the survival of the fittest.”
Therefore, Kotak has clearly hinted towards a cyclical slowdown, which will be over as soon as the businesses adjust to the new rules of the game. If we analyze the reasons behind the economic slowdown, there are evidences to vindicate Uday Kotak’s assessment.
So far, the political economy of the country was operating under the framework of Nehruvian Socialism, where even the private businesses could not exit from the market, as the state gave a bailout package to the companies in the name of protection of workers.
Now, the Modi government is trying to a rule-based capitalist economy, where only the firms which are able to make the profit will survive and the loss-making ones will exit from the market.
The process of formalization and the war on black money started in the first term of the Modi government. Demonetization coupled with GST started the process of formalization. The informal sector had to suffer the double whammy- demonetization and GST; demonetization destroyed the funding network to the informal sector while the GST forced them to bear the compliance cost.
Many firms in the informal sector closed down and the demand shifted to the formal sector. Therefore, the sales of the formal sector firms registered growth for few quarters after demonetization and GST. But, as the firms in the informal sector closed down, leading to massive job loss, the demand slumped in the last few quarters.
The job security among the common people forced them to not spend, which eventually resulted in a consumption slump. Given the fact consumption accounts for more than two-thirds of India’s GDP; the GDP growth reached to decade low of 4.5 per cent.
The sector which suffered most from the demonetization and GST is the manufacturing. The slowdown in manufacturing had resulted in negative Index of Industrial Production (IIP) growth in the last three quarters.