This article is a part of an EXCLUSIVE SERIES on slowdown. If you haven’t yet read the first part of this series, check it out here: PART I
PART II
Most of us in our junior college would have studied that the computation of the gross domestic product (GDP), it is a summation of private consumption, private investment, government spending and net exports (exports-imports). Now this is where the trick lies. In the previous article I did mention that India is running largely on a single engine that is continuously fueling the growth of the economy. Let’s understand this statement with some numbers.
Let’s assume the private consumption to be something around 100, private investment at 50, government spending at 80 and net exports at -50 (exports to be 50 and imports to be 100). When you add all of these numbers, the GDP turns out to be something like this:
GDP: 100+ 50+ 80+ (50-100) = 180.
Also, one thing to note here is that major part of this private consumption is derived from what the richest 100 million people in India want to consume and therefore, as long as they consume in India, the GDP would stay robust. But what if these consumers shift from domestic to imported consumption added with a minor slowdown as we discussed in the previous article?
The numbers do completely go for a toss. If the private consumption falls down to something around 30 (of which 20 would be due to the slowdown and 50 would be due to actual shift from domestic to imported consumption which would then be added to the imports later). Consumption pulls investment and seeing the decline in the consumption, private investment would start decreasing to something around 30. Government spending would still stay on the same levels given the fact that the government wants to maintain fiscal discipline and hence, there is only minor scope for an infusion in the economy. Hence, government spending would marginally increase to 100. Exports have been India’s weakest link witnessing further pain which need to be reflected and hence, the figure turns out to be 30. Now surprisingly, the imports would increase majorly due to the demand of newly converted private imported consumers and the figure would go up to 150. When you add the numbers the figure turns out to be something like this:
GDP: 30 + 30 + 100 + (30-150) = 40.
A shift from domestic to imported consumption with no other segment fueling domestic consumption makes India’s consumption story look vulnerable and bleak and the country in a dire need to create a second line of defence.
SHORT TERM MEASURES TO BRING THE GROWTH STORY ON TRACK:
Throughout the example one thing you must have understood that the revival of the consumption and creating the next set of consumers has to be primary area of concern for the government. Immediate short term steps are needed to be taken to give excessive purchasing power in the hands of the consumers so that the consumption continues. To build the next set of consumers it is really important that a paradigm shift is taken and manufacturing takes the front seat to drive economic growth or else based solely on the consumption theme, the Indian economy is heading towards a plateau.
Consumption constitutes to seventy percent of the total GDP and therefore getting it back on track would be more difficult at this junction. Reducing GST on certain goods like automobiles and other consumer products could boost consumption. The slowdown in the automobile sector has to be treated carefully as the automobile sector constitutes 45% of the manufacturing throughout the economy. The GST rate cuts should be handled carefully as this would also result in a loss of revenue for the government.
The government also would have to insist the banks to transmit the repo rate cuts and force the banking system to lend more rather than them buying government securities. The focus should be completely on cheap availability of capital and increase in the liquidity of the banking and the financial sector. There should also be a quality review of the non-banking financial companies (NBFCs) and the government should push for good corporate governance in the same. A thought could also be given on the formation of the ‘bad banks’ with RBI excess reserves. The government should also reduce stake in the banking sector and only keep core public sector banks.
Divestment of stake from the public sector undertaking and those funds should be directed towards the National Investment and Infrastructure Fund (NIIF). The government should also make sure that the divestments take place in a hassle free manner and the stake sales do not get stalled (Air India stake sale already stalled).
Revision could be done in the Essential Commodities Act and Agricultural Produce Market Committee (APMC) to liberalise the agricultural sector. Subsidies and farm loan waivers would not be the solution for problem of lack of efficiency of the agricultural sector. Rather, steps should be taken to increasing the productivity of the output from agriculture. Incentivize refrigerated storage and marketing chain infrastructure through dedicated transport corridors and special credit and incentives.
The government needs to aggressively work with the state governments to increasing the spending on health and education. An increased spending towards the same would lead to the formation of human capital which would in turn be detrimental for the revival of the manufacturing sector. The spending on the education could increase from 4.3% to around 6%-7% of the GDP and the spending on health from 1.3% to around 3%-5% with more funds for basic health and sanitation.
The government needs to bring the consumption story back and make sure that there is enough liquidity and disposable income in the hands of the people to spend so that the economy does not head towards a plateau in the next couple of years. In the meantime, the government also needs to focus on revival of the manufacturing segment and shifting the excessive labour from agriculture to the manufacturing segment so that there is increased productivity in both the agriculture and manufacturing sector. The manufacturing should be export oriented to that the country aims to have a favourable balance of payments. Focusing on increasing the consumption should be the centrifugal thought behind any policy implementation as the slowdown in the near term could only be tackled by consumption!