Tackling the economic slowdown: 

Tackling the economic slowdown:

Brief Overview

• In the background of a slowdown in economic growth for five consecutive years, the author of this article makes a case for greater public investments in infrastructure.

Why is growth important

• The government needs tax revenues to supply public goods and services. These tax revenues depend upon national income.
• Growth is required for employment generation as demand for labour exists only when there is a demand for goods.

Transforming the economy to meet the challenge

• The government says it is working for transforming the economy.
• They identify the issues of ease of doing business, labour market reforms, land reforms.
• However, the economy today is far less regulated than in 1991 and all governments since then have been working on bringing in “more structural reforms”.
• It is difficult to relate slowing domestic growth to sluggish world trade trade as 2016-17 was a year of good exports.
• The argument made for land and labour market reforms as pre-requisite for accelerating growth today must be able to account for how the economy came close to achieving 10% growth in the late 1980s and during 2003-08 when the policy regime was no more liberal than it is now.

Case for a fiscal stimulus and increased public investment in infrastructure

• Capital formation has steadily declined for 6 years now.
• Capital formation or investment, generally drives growth in the economy.
• Investment is an immediate source of demand as firms that invest buy goods and services to do so.
• It also expands economies capacity to produce.
• There are two sources of investments in an economy- public and private.
• Private investment is unlikely to revive on itself in a slowing economy.
• Increase in public investment by the government will not only increase the demand and quicken growth but it may be expected to encourage private investors as the market for their goods expand.

But what about the higher deficit caused by increased public investments?

• Economists caution governments against running a higher deficit due to increases public investments, for the fear of inflation.
• However, in any such assessment, the increase in inflation must be offset by the growth achieved due to greater public investment.
• Also, the increase in inflation is likely to come due to shortage of agricultural products.
• Therefore, any plan of increasing the growth must address the problem of agricultural shortages.

The way forward

• Since 2014, the government is focussing on the supply side by making it easier for the firms to produce. But now, we are facing a demand shortage.
• The correct approach shall be to aim to balance the budget over growth cycle.
• That is, the deficit may be increased when the economy slows and may be contracted when the economy quickens.
• Repair and reconstruction of India’s creaking infrastructure is the direction in which greater public investments must flow.