Understanding India’s Economic Slowdown
Context
Indian economy has been witnessing a lower growth rate as compared to the government’s projections. The economy saw a downturn, regardless of the increase in capital expenditure by the government.
The article, The kind of jobs needed for the ‘Viksit Bharat’ goal- gives a long-term view of the economy’s roadmap and the necessary steps that cannot be ignored.
Relevance:
GS-03 (Economy)
Dimensions of the Article
- India’s economic growth and its issues
- Key challenges with the Economy
- Government’s Action So Far
- Significance of Understanding the Growth Model
India’s economic growth and its issues:
- India’s economic growth has slowed significantly, particularly since 2019.
- This slowdown comes despite rising government expenditure on capital-intensive projects.
- Historically, the period between 2004 and 2011 witnessed high economic growth, accompanied by poverty reduction.
- During this time, welfare policies and social sector spending played a key role in boosting demand among the lower-income population.
- However, post-2012, and especially after 2019, economic growth has weakened. 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.
Key challenges with the economy:
- Declining Private Consumption: Household spending, which drives India’s economy, has been slowing. When people don’t spend, businesses don’t earn, reducing their incentive to invest.
- Weak Private Investment: Companies are hesitant to invest despite tax cuts and government incentives. Low demand discourages new projects.
- Government’s Spending Focus: The government has prioritised capital expenditure, such as infrastructure projects, expecting it to drive private investment. However, this hasn’t yielded the desired results.
- Economic Shocks: Events like demonetisation, GST rollout issues, and the pandemic disrupted economic activity and household earnings.
- 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
- Increase capital expenditure: 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
- Increase Revenue Expenditure: More spending on health, education, and welfare programs will directly benefit lower-income groups, driving demand.
- Boost Rural Wages: Programs 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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