Issues related to Economic growth

[op-ed snap] Limited scope for sharp recoveryop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3-Slowdown in the economy, supply side-demand side, way forward for recovery.


Context

In order to revive the economy, the Government must choose between tax reductions and increasing rural spending.

The Current Status of the Indian Economy

  • 5 % in 2019-20: The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20.
  • Cause of the slowdown: The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical
  • Stagnant income and stagnant incomes: Despite largely stagnant incomes, private consumption has been financed over the past few years through lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led pay-outs.
  • Private consumption is the largest driver of growth.
  • Depleting savings: The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13.
  • Depleting credit in the system: Overall credit in the system has dried up.

 Rural economy

  • Low wages and stagnant incomes: Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent.
  • Weak real estate sector: The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past.
  • The sector is experiencing lower private sector investments recently.

Limited scope for a sharp recovery

  • The following factors render the scope for sharp recovery limited.
  • Consumption issue is structural:  The slowdown in private consumption is a structural issue linked to low household income growth.
  • Low job creation: Low consumption is in turn, linked to the basic problems of low job creation.
  • Low Income: Low consumption is also linked with stagnant farm incomes.
  • None of the above factors is likely to change suddenly, limiting the scope of recovery.
  • Low Investments: Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
  • Stressed Government consumption: Which has been supporting growth over the past few years, remains under stress.
  • The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP.
  • The public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
  • NBFC’s role: Recovery will also depend on the health of the financial sector, especially that of NBFCs.

 Use of the fiscal space

  • Supply-side: The government has shown a clear preference to rely on supply-side measures (like corporate tax cut) to support growth.
  • Need to address demand-side: Expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
  • Spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can decrease pain in rural areas.
  • Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.

Way forward

  • Widening of the tax base- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
  • Broad-basing of the income and consumption profile: Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers.
  • The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
  • Role of the private sector: Given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

Conclusion

Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.

 

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