Understanding Economic Growth and Slowdown (2004-2011 vs. 2011-2023)
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This post on Understanding Economic Growth and Slowdown (2004-2011 vs. 2011-2023) has been created based on articleHow can the Budget arrest growth decline?” published in The Hindu on 30th January 2025.

UPSC Syllabus topic: GS Paper 3- Economic Development

Context: The article examines India’s economic slowdown and explores how fiscal policy, particularly government expenditure, can help revive growth and boost private consumption. It highlights the contrast between different phases of economic growth in India—specifically, the high-growth period from 2004-2011, which was marked by a reduction in absolute poverty and increased social sector spending, versus the post-2011 period, especially since 2019, which has seen a slowdown in private consumption and private investment.

What is the current state of the Indian economy?

  1. The Indian economy is currently experiencing a slowdown, as indicated by recent GDP estimates. Despite increased capital expenditure by the government, growth rates have remained below expectations.

2.     The post-reform period of the Indian economy be divided into three phases:

  • 1991-2004: Transition period with moderate growth
  • 2004-2011: High growth with poverty reduction
  • 2011-2023: Slowdown in growth, declining private consumption and investment.
  • 2004-2011:This period experienced high economic growth along with a decline in absolute poverty. A key reason was increased state intervention through welfare policies and rights-based legislations, boosting consumption among lower-income groups.

How did fiscal policy impact private consumption during 2004-2011?

  1. Government spending during this period focused on social welfare programs and rural development. Since lower-income groups have a higher propensity to consume, this led to a broad-based increase in demand.
  2. For the first time in the post-reform era, the share of private consumption held by the richest 20% declined.
  3. Instead, consumption among the bottom 80% increased, indicating better income distribution and higher mass consumption.

How does government spending affect income distribution?

The effectiveness of government spending depends on its nature:

  1. Capital expenditure (Capex) on infrastructure (e.g., dams, nuclear projects): This leads to limited wage distribution, benefits businesses more, and may result in high import dependency.
  2. Revenue expenditure (e.g., wages under NREGA, pensions): Directly increases the purchasing power of lower-income groups, leading to higher demand and employment multipliers.

Why is revenue expenditure more effective in stimulating demand?

  1. It ensures that more money reaches workers, who spend most of their earnings on consumption.
  2. It reduces demand leakage to imports (as infrastructure projects often require foreign goods).
  3. It sets a wage floor (e.g., NREGA wages) that raises overall rural wages, benefiting informal sector workers.

How did increased social sector spending contribute to the 2004-2011 boom?

  1. Government spending on education, health, and welfare programs
  2. Rural development and agricultural investments improved livelihoods.
  3. Higher rural wages led to a broad-based rise in consumption.

What has the government done to address the current slowdown?

  1. The government has focused on capital expenditure in infrastructure, hoping to attract private investment.
  2. Corporate tax rates were reduced (from 30% to 22%) in 2019.
  3. However, private investment remains low due to weak demand.

Why has private investment not picked up despite these measures?

  1. Firms invest based on demand, not just cost savings or tax cuts.
  2. Existing factories are underutilized, reducing the incentive for expansion.
  3. The capital expenditure approach does not directly improve mass consumption.

What policy shift is needed to revive the economy?

  1. Increase overall fiscal expenditure (as a percentage of GDP).
  2. Reallocate spending toward revenue expenditure, particularly in the social sector.
  3. Prioritize labour-intensive projects with higher employment multipliers.

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