Context:
- As of mid-2019, the Indian Economy is facing economic slowdown as evident in the declining GDP growth rate. The decline in the GDP growth rate could be attributed to both supply-side factor i.e. declining Investment as well as demand-side factor i.e. declining consumption expenditure.
- The economic revival would require the government to focus on both demand-side i.e. boost consumption expenditure as well as supply-side i.e. enhance investment rates in the Indian Economy.
- However, the article highlights that the Government is erroneously focusing only on supply-side factors without taking into account the demand side factor. It is to be noted that investment rates in the economy cannot pick up unless the demand for the goods and services increases.
Consumption Expenditure in India
- The Consumption Expenditure in India accounts for almost 60% of India's GDP. Hence, the decline in the consumption expenditure would have a greater impact on India's GDP as compared to the decline in the Investment rates.
- Presently, there is a broad-based decline in the consumption expenditure across various sectors of the economy ranging from automobiles to biscuits. It is to be noted that there has been a decline in the demand even for commonly used household goods such as salty snacks, soaps, packaged tea, etc.
- This clearly highlights that the household budgets of the poor and middle class are under strain which has, in turn, forced them to cut down the expenditure on such commonly bought goods.
Reasons for decline in Consumption Expenditure
- Lack of Inclusive Growth: Inclusive growth is quite critical for sustaining the higher consumption expenditure. However, the growth trajectory in India has benefitted only a small section of India's society in recent times leading to income inequalities. Further, there has been an increase in unemployment levels leading to reduced income levels of the people.
- Government Policies: Government policies such as demonetization and GST have adversely impacted the informal sector which employs the majority of India's workforce. Further, the decline in the informal sector activity has reduced the demand leading to an adverse impact on the investment by the formal sector. This has, in turn, reinforced poor job creation and low demand leading to a vicious economic cycle.
- Agrarian distress: The agriculture sector in India is presently staring at distress due to a number of structural problems leading to poor income levels of the farmers and hence reduced demand for the goods and services in the rural areas.
Poor response of the Government
- The Government has erroneously focused on supply-side measures in order to enhance the investment rates. For instance, recently the Finance minister unveiled a number of measures to boost the economy. Most of the measures emphasize on increasing the investment rates.
- For example, the government has decided to infuse Rs 70,000 crores into Public sector Banks (PSBs) so as to enhance credit creation and investment rates in the Indian Economy. However, it may not lead to higher investment rates since the private sector is reluctant is invest due to lower demand.
- On similar lines, the government has decided to exempt the FPIs from the higher surcharge which it had earlier imposed during the Union Budget 2019. This is unlikely to have to affect since it would not boost the demand in the economy.
Way forward
The Government has to realize that the Indian economy would not get the necessary thrust unless the demand side factor is addressed.
The Union budget 2019 has failed to provide fiscal stimulus to address this problem. In this regard, the article recommends that there has to be a massive increase in public expenditure in rural areas, particularly on MGNREGA. Such an enhanced expenditure would have a local multiplier effect in the form of creation of employment opportunities, higher income levels, and consequently higher demand.
