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Current Affairs

Steps to kick-start economy

Date: 25 December 2019 Tags: Basics of Economics

Issue

India’s Growth rate has plumeted from the level of 8.1% in the fourth quarter of 2017-18 to 4.5% in the second quarter of 2019-20, a fall of 3.6 percentage points. This steady decline will have had an adverse impact on employment and poverty reduction.

 

Details

  • Analysts have been trying to decode whether the slowdown is structural or cyclical. If it is cyclical, the expectation is that there is a chance for upturn soon. If it is purely structural, it will take time until the structural rigidities are removed.

  • As far as India’s case is concerned there is plenty of evidence to indicate that the decline is cyclical due to reduced demand.

  • Several important sectors such as automobiles, consumer durables and housing show a slackening of demand. This is also reflected in the low capacity utilisation of several industries.

  • On the structural side while the reform agenda has been carried forward, there are segments such as agricultural marketing, land and labour markets which are still waiting for reforms.

  • One sector which needs immediate reforms is the financial system, more particularly the banking system and within it the public sector segment.

  • Even as the policy makers address the problem of non-performing assets, attention has to be paid to defining the relationship between governments and boards of public sector banks and on their respective roles in management.

  • One significant factor in the current scene is the steep fall in investment rate (gross fixed capital formation rate) from 34.3% in 2011-12 to 27.8% in the second quarter of 2019-20. This results in a sharp decline in the potential rate of growth by 1.6 percentage points.

  • Data shows a weakening of private consumption expenditure. But our efforts to raise demand is dependent on income.

Measures

  • The three autonomous elements that can be used as levers to raise demand are government consumption expenditure, government investment and exports.

  • Private investment can be treated as autonomous only to a limited extent. However, private foreign investment can be an independent factor which can be leveraged.

  • The three autonomous elements that can be used as levers to raise demand are government consumption expenditure, government investment and exports.

  •  Private investment can be treated as autonomous only to a limited extent. However, private foreign investment can be an independent factor which can be leveraged. But at present economy across the world is not booming. This leaves place for only government expenditure.

  • In the present context, the emphasis should be given to ensure that the entire increase in government expenditure is diverted towards capital expenditure and not short term gains.

  • As far as monetary policy is concerned, the central bank will have to take steps to quicken the resolution process of bad loans and help banks to move to a more healthy situation. 

  • Reforms in fiscal policy may have to wait till the economy turns around. The GST has to become more manufacturer and trader friendly to increase benefits for the government.

  • The banking system, currently, has become a burden. Quickening of the resolution process along with the recapitalisation of public sector banks has to take priority.

  • The cleansing of the financial system which also includes finding solutions to the problems of non-banking financial companies will help to push the economy up. 

Way ahead

  • The reasonably good monsoon may lead to an improvement in agricultural production and rural demand.

  • Exports can help a bit if there is strong effort and if the global trade environment improves.

  • Private investment can pick up provided the growth rate begins to look up. Restoring financial institutions like banking and non-banking to a healthy state when they can begin to lend confidently is the most essential prerequisite for faster growth.