The Ailing Indian Economy Needs a Consumer and Liquidity Push for Revival
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A turbulent global environment, a sluggish investment scenario and a dipping consumer demand at home have resulted in a worrisome economic slowdown in India. The gross domestic product (GDP) growth of 5% in the April-June quarter has ignited concerns that the slowdown might be a prolonged one. In fact, the real GDP growth has gone down from 8.2% in 2016-17 to 6.8% in 2018-19. Apart from the structural and cyclic factors, a part of this economic slowdown can be attributed to the strategic course corrections taken by this government over the past few years in the form of demonetization and GST roll out. Demonetization broke the back of India’s thriving black market economy by cutting the illegal liquidity flow. The cumbersome process of GST roll out on the other hand negatively affected the growth of small businesses in the country.
The Keynesian push
Finance minister Nirmala Sitharaman announced a series of measures last month aimed at reversing the slump including easing rules on foreign investment, removal of angel tax on start-ups, and concessions to the automobile industry. The government has also urged banks to transfer the benefits of repo rate cuts by the Reserve Bank of India (RBI) to borrowers by making loans cheaper. The government is taking a sectoral approach to economic issues and addressing the bottlenecks being faced by different industry sectors. The major steps taken to address the NPA crisis will also help pull the banking sector out of the lending mess. However, the current economic situation demands a greater fiscal policy intervention to boost consumer demand and income across sectors.
India right now needs to turn to Keynesian macroeconomics to pull the economy out of the slump. J.M. Keynes advocated that economies displaying tendencies of recession need to go all out to boost consumer spending and demand to be able to lift themselves out of the slump. Pouring in expenditure in strategic sectors such as infrastructure and establishing a low-tax regime is what Keynes would have advocated for India.
Revive the rural economy
At the heart of the current economic slowdown is what we can call the ‘rural distress’. A slump in rural income has resulted in significantly low rural demand in the country. An RBI paper on ‘Rural Wage Dynamics’ earlier this year found that rural wages have witnessed significant deceleration in recent years, from a peak of 38 per cent growth in 2014 to almost zero. This has spelled doom for private consumption in the rural economy. State Bank of India's latest study on ‘Root Cause of the Current Demand Slowdown’ also concludes that a substantial decline in both urban and rural wage growth is the most crucial structural factor impacting the slowdown.
The government needs to put special focus on reviving the rural economy by initiating significant expenditure on rural projects and infrastructure development. Increasing the minimum support price for farmers must also be considered to infuse more liquidity into the rural sector. Once the slump in rural incomes in reversed, consumer demand will gradually pick pace again.
Boost MSMEs to create more jobs and income
Incomes have not just declined in the rural sector but also in the urban economy. Decline in wage growth has been accompanied by low employment figures. The NSSO data released earlier this year showed that almost half the working age population in the country was without work. Reviving small-scale enterprises should be the government’s top priority as it is the MSME sector that creates a bulk of employment opportunities.
Boosting the MSME sector requires infusing fresh liquidity into the non-banking finance sector that needs to lend generously to small enterprises. In fact, the government must consider giving a stimulus package to the NBFC sector to help it tie over the liquidity crisis. Also needed is further improvement in the ease of doing business and making GST returns smooth for small and medium enterprises.
Cut GST rates on strategic consumer goods
Reduction in discretionary spending is the first effect of a slowing economic environment. It is therefore also important to help boost consumer spending by reducing GST rates on consumer goods. The government must seriously consider merging the 12 per cent and 18 per cent GST slab and reducing the 28 per cent slab to help boost consumer spending in the economy. Sectors such as automobiles which are going through the toughest phases need to be given special attention on the GST front. GST rate cuts will help spur demand and revive private consumption and discretionary spending.
Boost investment in infrastructure development
One of the most significant measures that can help improve incomes and employment is a boost to infrastructure development. The government did display its commitment to infrastructure in the Union Budget 2019 in which sops were also announced for the real estate sector. The government must now use a significant part of the fund borrowed from RBI to give a new stimulus to social infrastructural projects such as road and highways, schools and hospitals. Momentum also needs to be created for the real estate sector by helping boost the demand for housing.