India in Cyclical Slowdown!

India is going through a cyclical growth slowdown driven by fiscal consolidation and slower credit growth on macro-prudential tightening of consumer loans by the Reserve Bank of India (RBI), a Goldman Sachs report argued.

Cyclical Slowdown

A cyclical slowdown is a period of lean economic activity that occurs at regular intervals. Such slowdowns last over the short-to-medium term, and can be remedied by relevant fiscal and monetary interventions.

• Counter-Cyclical Measures
  • Till date interim fiscal and monetary measures include reductions in taxes and subsidies, also rate cuts to stimulate recovery
  • Recapitalization of the credit markets coupled with regulatory change is often seen as a necessary to spur recovery.

Structural Slowdown

A structural slowdown is a long-term period of economic weakness resulting from a permanent shift in the economy. The causes may include changes in technology, demographics, or consumer behavior.

• Causes
  • Technology: Structural slowdown is caused by the emergence of disruptive technologies.
  • Demographics: Changes in demographics are a cause of structural slowdown.
  • Consumer behavior: Changes in consumer behavior cause structural slowdown.
• Effects
  • Weak Economic Growth: Structural slowdown leads to weak economic growth for a long time.
  • Monetary and fiscal stimulus: Monetary and fiscal stimulusalone might not help in reviving the economy.
  • Structural policies: may be necessary to correct the maladies.
• Comparison with cyclical slowdown
  • A cyclical slowdown refers to a weak phase of economic growth that occurs periodically.
  • A structural slowdown is a deeper phenomenon that persists for a long time.

Understanding Cyclical and Structural Slowdowns

• Cyclical Slowdown
  • It is caused by fluctuations in the business cycle of the economy.
  • It is short-term and depends on factors like changes in consumer demand, interest rates, inflation, and business investment levels.
  • Generally, it is temporary and usually reversible as economies pass through business cycles.

• Structural Slowdown
  • This is more extended and profound deceleration in the economic growth.
  • It is usually caused by deep-rooted changes such as demographic changes, low productivity, obsolescence of infrastructure, or even the pattern of trade in the world.
  • Long term typically requiring profound changes or reforms in economic policy, labor market, or technology.

Differences

• Type of Causes
  • Cyclical slowness of the economies is short-term; structural are fundamental.
• Policy Response
  • Cyclic slowdowns will respond well with a short-term policy, but structural slowdowns will require long-term reforms.