Addressing Demand Drought in Indian Economy

What is the issue?

Indian Economy is evidently witnessing a slowdown phase, with weak consumption demand being a factor.
In this context, here is an overview of the causes for it and the ways to address it.

What is the present economic scenario?

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 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 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?

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 policy makers are focused at pegging inflation at or less than 4% (even it means retarding growth as a fallout).
Low inflation extracts costs in the form of lower nominal growth (growth measured in current prices).
This could crimp tax receipts and in turn lead to cuts in government spending.
Also, with wage/salary 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 demand - 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 sentiment is a key ingredient affecting consumption.
It is vital for policy makers 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.
On the monetary side, 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.
On the fiscal side, targeted tax breaks or non-tax sops that incentivise consumption is one option.
The latest decision to cut baseline corporate tax rates is certainly a good move, aimed at incentivising 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.
As far as rural demand is 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.

What are the 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.

Source: The Hindu