India is facing three macroeconomic puzzles

Source: The post India is facing three macroeconomic puzzles has been created, based on the article “Three macro puzzles and policy implications” published in “Business standard” on 20th July 2024

UPSC Syllabus Topic: GS Paper3- Economy-growth, development, and employment

Context: The article discusses three main issues: weak consumption, low employment growth, and low core inflation. It suggests that actual economic growth is modest. It recommends no tax cuts, privatizing PSUs, and lowering interest rates to improve the economy.

For detailed information on India’s Economic Growth and challenges read this article here

What are the three macroeconomic puzzles facing India?

1. Soft Consumption: Despite a reported GDP growth of around 7% to 9% annually over the past three years, consumption growth is only 4%. This is half the rate of overall GDP growth. Data on industrial capacity utilization, corporate sales, FMCG, and two-wheeler sales support this weak consumption. Household savings have declined, with net financial saving at 5.7% of GDP in 2023-24, down from 7.6% before COVID-19.
2. Weak Employment Growth: Official numbers show good growth, but the reality on the ground indicates underwhelming employment opportunities. This contradiction suggests that reported high GDP growth isn’t translating into job creation.
3. Low Core Inflation: Core inflation, excluding food and fuel, is around 3%. This suggests weak aggregate demand. Low core inflation is inconsistent with the reported high GDP growth rates of 9.7%, 7.2%, and 8.6% over the past three years.

What should be the policy response?

1. No Tax Cuts: Tax cuts would benefit only the top 10-20% of the population. GST revenues are just recovering to pre-GST levels; cuts would harm public finances.
2. Privatization of PSUs: Implementing a program of privatization, particularly for PSUs like MTNL. This could encourage investment and modernization by new private sector owners, as seen with the Tata’s modernization of Air India.
3. Lower Interest Rates and Weaker Exchange Rates: Reducing interest rates could help improve export competitiveness, as the rupee has been exceptionally strong compared to other emerging market currencies, affecting Indian exporters’ competitiveness.

Question for practice:

Examine the three macroeconomic puzzles India is facing and the proposed solutions for them.