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Demand downturn in Indian Economy

Demand downturn in Indian Economy

Tag:GS-3||Economy ||Structure of the Indian Economy ||National Income & it’s measures

What is the issue?

  • Indian Economy is evidently witnessing a slowdown phase, with weak consumption demand being a factor.
  • This is the weakest pace of the economy in more than 6 years.

What is the present economic scenario?

  • 5% in the first quarter
    • A worryingly persistent slowdown dragged the economic growth in India down to 5% in the first quarter of 2019-20.
    • This is the weakest pace of the economy in more than 6 years.
  • Private consumption expenditure
    • Private consumption expenditure has decelerated so sharply that at 3.1%, the expansion is at an 18-quarter low.
    • Notably, private consumption expenditure contributes more than half the GDP and is the mainstay of demand.
  • Automobile sales slowdown
    • Automobile sales continued to plunge in August 2019.
    • It posted the worst drop since the Society of Indian Automobile Manufacturers (SIAM) started collating wholesale vehicle sales data in 1997-98.
  • The absence of demand pervades almost every key sector – from consumer durables to biscuits and housing.

What contributed to the demand drought?

  • Multiple factors have contributed to the demand drought
    • Lack of jobs, or even where jobs are available, a limitation about the incomes from such work
    • The long-lasting rural distress
    • Widening inequality
    • Even the RBI’s successful targeting of inflation
  • Inflation– It is said that the RBI’s remit of containing consumer price index (CPI) based inflation within a 2-6% band may be proving less than ideal for India.
    • This is especially the case if monetary policymakers are focused on pegging inflation at or less than 4%.
    • Low inflation extracts costs in the form of lower nominal growth.
    • This could crimp tax receipts and in turn, lead to cuts in government spending.
    • Also, with wage increases most often linked to inflation, slower price gains would result in smaller annual increments.
    • This would further leave the earners more wary of spending on discretionary or non-essential purchases.
  • Rural distress
    • The crisis of demand in the rural hinterland has worsened to the point where sellers of consumer goods have seen appreciable slowing in sales growth in recent quarters.
    • Weak growth in rural income and moderation in rural infrastructure spending would lead to de-growth in tractor sales volume by 5-7% in 2019-20 fiscal.

What is the need now?

  • Consumer sentimentis a key ingredient affecting consumption.
    • It is vital for policymakers to address weakness in consumer sentiment through a mix of measures in the economic realm.
    • Both monetary and fiscal measures are needed, as well as ensuring a congenial socio-political climate to enhance the ‘feel-good’ factor is essential.
  • Monetary Policy
    • Ensuring lower borrowing costs as well as adequate availability of credit is crucial.
    • This would create an enabling environment for consumers to consider taking out loans to fund their purchases.
  • Fiscal Policy
    • Targeted tax breaks or non-tax sops that incentivize consumption is one option.
    • The latest decision to cut baseline corporate tax ratesis certainly a good move, aimed at incentivizing and boosting capital investment.
    • However, companies may be uncertain of investing when demand for their manufactured goods is still weak.
    • It is therefore imperative that the revival of demand remains a key priority of any new policy measure.
  • Rural demand
    • As far as rural demandis concerned, the government must go beyond the PM-KISAN income supplementing scheme.
    • It should tackle the crisis of low real farm incomes by radically recalibrating its approach to the agrarian economy.
    • As an immediate and necessary measure, the Mahatma Gandhi National Rural Employment Guarantee Scheme needs to be reinvigorated.
    • Ensuring timely and adequate funding and the fixing of appropriate wage levels are essential.

Challenges

  • Any economic stimulus package that the government may come up with would necessarily assume a short-term loosening of the fiscal deficit goals.
  • If the stimulus also entails a large expenditure component, there could also be second-order inflationary consequences.
  • However, the necessity to revive demand at a juncture when the economy is heading for a stall is high now.

 Conclusion

  • The Indian economy has huge potential, the current slowdown must be dealt with a bottom-up strategy, which may include boosting agriculture, food processing, tourism, MSME, automobiles, and pharmaceuticals.

 Mains model questions

  • Discuss the current economic slowdown being witnessed by the country. What are the underlying causes and what measures are needed to be taken to bounce back on the right growth trajectory? Explain.

 References