Untangling economic growth conundrum won't be easy

Untangling economic growth conundrum won't be easy

Vivek Kaul

 If you are the kind who regularly follows headlines in newspapers or the social media, you would know by now that what economists call ‘consumer demand’ has been collapsing in India. Car sales are down. Two-wheeler sales are down. Tractor sales are down. Even innerwear is not selling like it used to.

 Economists have now come to the conclusion that this collapse in consumer demand is because of the lack of investment in the Indian economy,   over the years. What does this mean in simple English? Investment essentially means setting up new factories, new buildings, new roads, new hotels, new services, etc.

 These investments create jobs for people. Jobs help people earn an income. And once an income is earned, people can spend money. The money spent adds to consumer demand. It also means an income for people who sell things or work for companies which sell things. These people also go out and spend money and add to consumer demand. This creates a multiplier effect and the economy grows at a rapid rate.

The problem is that investment in the Indian economy is down in the dumps. Data from the Centre for Monitoring Indian Economy suggests that the value of new projects announced fell to a 15-year low during the period April-to-June 2019. This lack of fresh investment has finally started to have an impact on consumer demand. Private consumption expenditure forms nearly three-fifths of the Indian economy.

So, what’s the way out of this situation? The Indian economy needs more investment. The problem is that corporates invest when they see a profitable future. Right now, with consumer demand collapsing, corporates don’t see that. Over and above this, on the whole, Indian corporates are still nowhere near fully utilising their existing production capacities. In this scenario, it doesn’t make sense for them to invest and expand. Many corporates are struggling to repay debt. They are clearly not in a position to take on more debt, invest and expand.

Where does that leave us? While encouraging investment is important, what is more, important in the short and the medium term is to get consumer demand back on track. The reason is simple unless there is increased consumer demand, no private corporate is going to invest. Hence, it would have made more sense for the government to cut personal income tax rates, rather than corporate income tax, as it has. Further, a rationalisation and simplification of the goods and services tax (GST) will go a long way in encouraging consumption and helping small businessmen.

Another suggestion that has been made multiple times is that the government should increase its overall expenditure. This is a suggestion that gets made every time any economy is in trouble.

The origin of this goes back to the British economist John Maynard Keynes. Keynes, writing in his magnum opus The General Theory of Employment, Interest and Money, had said: “To dig holes in the ground, paid for out of savings, will increase not only employment, but the real national dividend of useful goods and services.”

What Keynes was rhetorically suggesting here was that if the government has run out of options to spend money, it can possibly get people to dig holes, and pay them for it. This will obviously increase employment. Once the people digging holes get paid by the government, they would spend that money and help the overall economy grow.

How does this apply in the Indian context currently? The overall government expenditure in 2017-18 and 2018-19 went up by 15% and 9.3% (adjusted for inflation), respectively. This, when the overall Indian economy grew by 7.2% and 6.8%, respectively.

If we add the fiscal deficit of the central government, the off-budget borrowing carried out by the central government, the fiscal deficits of the state governments and the borrowing of the public sector, it comes close to 9% of the Gross Domestic Product (GDP).

The point being that the government is already spending a lot of money to give economic growth a push upwards. There isn’t much more that it can do on the expenditure front.

This is where the Indian economic growth conundrum is stuck, and untangling it won’t be easy at all. 

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