Four things India’s economy needs right now
The citizenship law is the leading cause for protests across the country, but research shows that economic distress and joblessness add to social unrest, especially among the youth.
So, what options does the government have to claw out of the current slowdown and spur employment? In the short-term, most economists agree the government will have to fire three growth cylinders: Personal incomes, demand and government spending.
Here’s a look:
Big consumption fall
First, a snapshot of current economic indicators. Growth has fallen off a cliff since sliding below seven per cent in 2018-19. Latest data available shows gross domestic product (GDP) slowed further during the July-September 2019 quarter at 4.5 per cent, against a five per cent rise in the first quarter, a six-and-a-half-year low.
The number 1 reason for this is a slump in consumption, or demand, which refers to everything ordinary people spend and buy, including purchases made by the industry. The slide is bigger in rural areas. The now junked 75th round of the Consumer Expenditure Survey 2017-18 showed that average spending by a person had fallen 3.7 per cent to ₹1,446 per month in 2017-18 - the steepest fall in more than four decades.
Private consumption, as reflected in a measure called the private final consumption expenditure or PFCE, grew by five per cent in second quarter of 2019-20 compared to 3.1 per cent in the first. This isn’t adequate. Gross fixed capital formation, a measure of investments going into the economy, slowed to one per cent against a growth of four per cent previously. Only government spending is keeping the economy afloat. Government’s final consumption expenditure grew by 15.6 per cent during the second quarter after rising 8.8 per cent in quarter one.
Economists are often split on what kind of a slowdown India is facing: Structural or cyclical. Cyclical refers to normal upswings and ‘downs’ in business cycles. Structural slowdown is harder to correct because it’s more deep rooted. Whatever it is, economists nearly agree that reviving demand by much higher government spending to boost consumption and investment is the only real option.
As well as giving industrial stimuli like the recent corporate tax rate cut, the government also needs to put more money directly into the hands of people, which would have a textbook multiplier effect. Multiplier effect refers to a larger change in output (in this case, of goods due to demand) at every level of input or government spending. The government has a very handy tool to do this: The PM-Kisan programme, which currently hands out ₹6,000 per annum directly to 1.82 million registered farmers. This could be expanded, albeit at the cost of a higher fiscal deficit. Economist Arvind Subramanian, a visiting lecturer at the Harvard University, co-authored a paper for a quasi-UBI to 60-80% of the rural poor to offset rural distress. They argue an annual transfer of ₹18,000 ( ₹1,500 a month) can cover three-fourths of the rural population at a cost of 1.3 per cent of gross domestic product (GDP) or ₹2.6 lakh crore at 2019-20 prices. The government would also do well to allocate more funds to the Mahatma Gandhi National Rural Employment Guarantee Scheme and increase the number of days of work under the programme.
Multiple indicators, such as slowing rural wages and consumption, point to either a fall in incomes or slower growth in personal incomes. This piece in Livemint, our sister publication (https://www.livemint.com/news/india/why-the-picture-on-poverty-is-incomplete-11574269577580.html), concludes, after an analysis of the junked consumption expenditure survey, that the immediate fallout is that “poverty headcount ratios would, in all likelihood, have increased between 2011-12 and 2017-18, as against a sharp decline between 2004-05 and 2011-12”. The Indian consumer has turned skeptical because costs have gone up and incomes have stagnated.
People’s investments are locked in stalled real-estate projects, squeezing their spending ability on other goods. One data set by economist Hetal Gandhi of Crisil Research shows that total average earnings of farm households from agricultural related income, which includes rural labour wages, had a flat growth of 0 per cent in 2018 at ₹65,000 compared to an eight per cent rise in 2017.
Urban income growth from the formal sector, as reflected in cost of employees for 750 listed companies, which had been averaging 10-12 per cent, have fallen to five per cent in the last quarter of 2018-19. If one looks at a six-quarter data of employee cost prior to quarter three of FY19, one saw a growth rate per employee of 10-12 per cent, which in the last quarter was five per cent. An income crunch is clear.
It is an immutable law that economic growth depends on investment and exports. A credit crunch by shadow banks or non-banking financial corporations (NBFCs) has had a reverse multiplier effect, meaning the pool of ‘loan-able’ funds has shrunk, leading to high borrowing costs and drying up of new investments and jobs. Overall, Indian firms announced new investment worth ₹95,300 crore in the quarter ending September 2019, according to the Centre for Monitoring Indian Economy. This is a 59 per cent decline compared to the corresponding period a year ago. Private investment is a direct function of expectations of returns by an investor.
Structural aspects like a better Goods and Services Tax (GST), banking reforms and measures to spruce up the ‘ease of doing business’ are important but are more longer term goals.
In the short term, there are four drivers of aggregate demand, or the sum total of demand of every person in any economy for goods and services, critical for growth. These are private final consumption expenditure, or spending by individuals, government spending, private investment and net exports. These engines need a spark in the upcoming Budget to be presented on February 1. According to economist Deepak Nayyar, “government expenditure (Centre plus states) on education and health as a proportion of GDP is almost the same as it was a decade earlier and is woefully inadequate”.