India’s Economic Slowdown: Causes, Challenges, and the Path to Revival

Context:

The Indian economy is facing turbulence, as reflected in the recent GDP estimates. Growth is lower than the government’s earlier projections. This is surprising, given the significant increase in capital expenditure in recent budgets. The Economic Survey had pointed out this contradiction—despite the government pumping money into infrastructure, private consumption remains sluggish.

Relevance:
GS-03 (Indian Economy)

Dimensions of the Article:

  • What is the issue in detail?
  • Challenges with the Economy
  • Government’s Action So Far
  • Significance of Understanding the Growth Model

What is the issue in detail?

  • India’s economy saw a drastic slowdown since 2019 despite increasing government expenditure on capital-intensive projects.
  • Earlier, the period between 2004 and 2011, India saw a high economic growth alongside poverty reduction due to various welfare policies and social sector spending that boosted demand among the lower-income population.
  • However, the economy started becoming weak after 2019.
    • Private consumption and private investment—both crucial for sustained growth—have remained sluggish. Several shocks, including demonetization, the introduction of GST, and COVID-19 lockdowns, further worsened the situation.
  • A key observation from past growth trends is that economic expansion is most sustainable when income levels at the bottom of the pyramid rise faster than at the top. This dynamic was missing in recent years, leading to weak demand in the economy.

Challenges with the Economy

  • Declining Private Consumption: Household spending, being the key driver of the economy, has been slowing. This is reducing the potential for businesses to earn, which is affecting investments.
  • Government’s Spending Focus: The government’s notion of prioritising capital expenditure is yet to drive private investment.
  • Economic Shocks: Series of events starting from demonetization, GST rollout till the recent pandemic has created a huge vacuum in the economy.
  • High Income Inequality: The rich continue to accumulate wealth, while the spending power of the lower-income groups remains limited.

Government’s Action So Far

  • The government has acknowledged the slowdown and taken steps to boost investment.
  • The main strategy has been to increase capital expenditure, believing it would stimulate private investment. However, this approach has not succeeded in reviving demand.
  • In 2019, the corporate tax rate was slashed from 30% to 22% to encourage investments. Yet, companies did not expand their operations due to weak consumer demand. Even as the government boosted infrastructure spending, fiscal expenditure as a percentage of GDP declined.
  • The problem is that capital-intensive projects do not immediately generate broad-based employment or income. Without demand-side support, economic revival remains elusive.

Significance of Understanding the Growth Model

  • Looking at past economic trends provides crucial insights. The high-growth phase of 2004-2011 had a unique feature: the bottom 80% of the population saw their consumption rise faster than the richest 20%. This was possible because of the government’s targeted spending on welfare programs, higher rural wages, and investments in agriculture.
  • When government spending benefits lower-income groups directly, it creates a strong multiplier effect. Increased spending power translates into higher demand for goods and services, boosting overall economic activity. This, in turn, attracts private investment.

Way Forward

To revive economic growth, the government needs a shift in fiscal strategy:

  • Increase Revenue Expenditure: More spending on health, education, and welfare programs will directly benefit lower-income groups, driving demand.
  • Boost rural wages: Programmess like MGNREGA should be strengthened, ensuring better incomes for rural workers.
  • Focus on labour-intensive projects: Infrastructure investments should prioritise sectors that create jobs and boost incomes quickly.
  • Enhance Agricultural Investments: Supporting farmers and rural industries can create a ripple effect on consumption and growth.
  • Balance Capital and Revenue Spending: While infrastructure is important, direct income transfers and welfare spending should not be ignored.

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