Growth matters but income levels matter more

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Source: The Hindu

Relevance: An aspirant can understand the importance of various policy measures in the time of economic difficulties.

Synopsis: The magnitude of contraction in the economy and the policy responses towards it raises the question of growth prospects for the next year.

Issues that are threatening the growth prospects of the Indian Economy

  • Magnitude of contraction in the economy: The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%), and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
  • Rising unemployment rate:
    • According to the unemployment data released by the Centre for Monitoring Indian Economy (CMIE), over 15 million jobs were lost in May 2021. It is higher than the 12.3 million in November 2016, the month of demonetization.
    • The job losses also bring out the high informality and vulnerability of labor in India, as of the total jobs lost during April-May, 17.2 million were of daily wage earners.
    • It is known that employment and aggregate demand in an economy are related. Similarly, there is a positive correlation between aggregate demand and output growth.
    • Hence, the prospects of growth revival in the next year look weak at the moment
  • Low business confidence
    • Business confidence index (BCI), from the survey by the industry body FICCI, declined to 51.5 from 74.2 in the previous round.
    • Declining household income and lack of savings have given rise to weak demand. This in turn had impacted the business confidence.
  • Low Manufacturing Purchasing Managers’ Index
    • PMI has slipped to a 10-month low, indicating that the manufacturing sector is showing signs of strain, with growth projections being revised lower.
    • Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.

Why it is said that the government’s response will not aid growth recovery?

Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures, with more and more guarantees by the government to improve the flow of credit to important sectors. However, this policy stance is unlikely to prop up growth for three reasons

  1. First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side. In times of financial anxiety, what is needed is direct state spending for a quick demand boost.
  2. Second, large parts of all the stimulus packages announced till now would work only in the medium term. These include policies related to the external sector, infrastructure, and manufacturing sector. In fact, some policies towards agriculture, such as productivity enhancement through the introduction of new varieties, will only work over years.
  3. Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side, as this could result in poor growth performance if private investments do not pick up. Further, the credit easing approach would take a longer time to multiply incomes, as lending involves a lender’s discretion and the borrower’s obligation.

What is required now is a sharp revival in overall demand. Income levels matter more than growth rates at this juncture. Hence, the government should find ways to increase the disposable income of its people to revive growth.


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