Revving up demand is key to economic revival

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 per cent. First, 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 the 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 a high unemployment rate of 7.3 per cent. The results of 2,200 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 have 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 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.

The main driver of demand is private final consumption expenditure which comprises 58 per cent of the GDP. It is this type of demand that has to increase.

The 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, specially 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 enhancing 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 per cent 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, have 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 other drivers of demand, but have been declining.

The big tax cuts offered to the corporate sector, on the other hand, have failed to produce animal spirits.

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 per cent. These high income earners have reached a saturation point as far as local goods are concerned, and are looking for 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 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 lavish lifestyle in which the Indian component is a small part.

People working in the informal sector, comprising 89 per cent of the workforce, would love to spend more, but do not have money for it at such times. According to Nobel laureate Abhijit Banerjee, if they got 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 6,000 to 20 per cent of the poorest household per month. But the Congress party was defeated and the scheme 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 got a better social safety net, like health insurance and free good quality education for their children, 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.

The farmers are still distressed because though they produced bumper crops, their earnings suffered even with higher MSP. It did not yield them profits as government procurement was a problem.

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 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 a 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 per cent in January this year. 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 want to see land acquisition made easy and flexible labour laws where a company can hire and fire easily. We already have contract labour in most of the corporate sector comprising nine per cent 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 importantly, restoring consumer confidence so that they spend more and reverse the declining trend, along with job creation and fighting coronavirus, are the most important problems facing the country.

---

This commentary originally appeared in The Tribune.

• Indian Economy
• Economic Reforms
• India
• consumption expenditure
• DEMAND
• Informal Sector
• Tax Cut

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.