Expert Speak India Matters
Published on Mar 05, 2020
Increase govt spending in labour intensive industries to rev up economy

Even though the Government is claiming that green shoots are visible and there are signs of economic revival, it will take some time for the economy to bounce back from its severe slowdown. This is amply evident in the latest low GDP growth clocked in the third quarter at 4.7 percent. First and foremost, demand has to be revved up. There has to be an increase in government expenditure in labour intensive industries and it cannot just rely on monetary policy through interest rate cuts to stimulate demand. The Government has to play a very active role in creating jobs because India is faced with high unemployment rate of 7.3 percent. The results of 2200 companies reveal that there has been no increase in net sales or profits in Q3.

Jobs will give money in the hands of people like daily wage labourers in construction work and their spending, though meagre, will increase. The construction industry is facing many problems like cost overruns which has slowed it down. The Government has committed a huge amount for   infrastructure projects and if they take off in a timely manner, jobs will be created. According to famous Cambridge economist J.M. Keynes, at such times, it is better that people are employed to dig holes and fill them up than remain jobless.

Next is exports which can raise consumer demand when they grow fast. But our exports have been stagnant and declining for a long time now. Exports definitely need more attention by improving our competitiveness. Our neighbours are doing much better than us, especially in some sectors like garments. Infrastructural problems remain at the crux of the slowdown in exports. The Government is taking measures to correct some of the deep rooted problems like building better ports and shortening the time of transportation and enhance regular power supply. Training in skills is also very important to upgrade the productivity of workers. It will make our exports more cost effective in the international markets.

The main driver of demand is private final consumption expenditure which comprises 58 percent of the GDP. It is this type of demand that has to increase. Private final consumption expenditure has been declining between 2010 and 2019. The big tax cuts offered to the corporate sector on the other hand has failed to produce animal spirits. They are in any case sitting on a pile of cash and are not coming forward to invest because they are faced with a huge stock of inventories due to slack demand. Their capacity utilisation has not increased hence they are afraid to undertake fresh investments. The corporate sector thus will not act as a stimulator of demand. Investment and gross fixed capital formation are another driver of demand but has been declining.

Among the private final consumers are the rich and upper middle classes who are not prepared to splurge either. In the last few years, inequality of income has increased, benefiting the top 10 percent of population. These high income earners have reached a saturation point as far as local goods are concerned, and are looking for the exotic and foreign made goods. Many have more than five cars per family. They are not going to be easily tempted to buy new ones despite heavy discounts as was visible during the last festive season. They are not likely to boost domestic demand. Their spending pattern consists of holidays abroad, fancy foreign goods and a high lifestyle in which Indian component is a small part.

People working in the informal sector comprising 89 percent of the work force would love to spend more but do not have money for it at such times. According to Nobel Laureate Abhijit Banerjee, if they get money in their hands, they would spend much more. He is the originator of the Congress Party’s Nyay scheme in which the party promised to give Rs 6000 to 20 per cent of poorest household per month. But the Congress Party was defeated and the scheme was dumped. It would probably have helped at this juncture to put extra money in the hands of the low income groups.

If the informal sector workers gets better social safety net like health insurance and free good quality education for their children then they would also be spending more. Unfortunately, they are vulnerable to being fired any time and have no accident insurance or maternity benefits. They are cautious about spending when faced with so much uncertainty.

In the villages, rural farm labour and non-farm workers have been facing declining wages and are cutting down their expenditure on fast moving consumer goods starting from biscuits to other items of daily use. The farmers are still distressed because even though they produced bumper crops, their earnings suffered even with higher MSP. It did not yield them profits as government procurement was a problem. It cannot be expected that the farmers would increase their consumption expenditure easily. In fact, an official NSO survey revealed the decline in rural demand in the last few years. With food inflation up it is hoped that farmers will have higher incomes.

Thus, the only way out is to increase government expenditure which is unlikely to be in big amounts for fear of stoking inflation. Retail inflation reached 7.59 percent in January 2020. All this time the government was in denial about the ongoing slowdown and termed it as cyclical. Now it admits that drastic economic reforms are needed because the downturn is structural.

The World Bank and the IMF wants to see that land acquisition is made easy and labour laws are made flexible, where a company can hire and fire easily. We already have contract labour in most of the corporate sector comprising 9 percent of the labour force, where hiring and firing is quite easy. Land laws are more difficult to change and the NDA government has experienced it. Banking reforms are urgently needed and the NBFCs have to be strengthened.  But most important is restoring consumer confidence so that they spend more and reverse the declining trend along with job creation.

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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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