7 PM | Rural India’s bane: from policy paralysis to policy vacuum | 27th September, 2019

Context:Economic slowdown and apathy for rural India is the result of a growth model that gives corporate interests higher priority.

Economic Slowdown:

  • An economic slowdown occurs when the rate of economic growth slows in an economy. Countries usually measure economic growth in terms of gross domestic product (GDP), which is the total value of goods and services produced in an economy during a specific period of time.
  • The GDP growth rate of the economy has slipped to 5 per cent in the first quarter of FY20, the lowest in over six years.
  • This is the third instance of an economic slowdown for India in the past decade after the ones that began in June 2008 and March 2011.
  • The technical term for the same is growth recession. A recession is defined in economics as three consecutive quarters of contraction in GDP.
  • But since India is a large developing economy, contraction is a rarity. The last instance of negative growth for India was in 1979.
  • A growth recession is more commonplace where the economy continues to grow but at a slower pace than usual for a sustained period, what India has been facing nowadays.

Steps taken by government to revive economic slowdown:

  • Mergers: in the biggest consolidation exercise in the banking space, the government announced four major mergers of public sector banks, bringing down their total number from 27 to 12, a move aimed at making state-owned lenders global sized banks
  • The merger of PSBs will unlock new potential. Big banks with their national presence and global reach will have larger credit appetite and ability to measure risk.
  • Sectoral measures: The auto sector is to get some relief on depreciation on vehicles and the government has clarified on the validity of registration on Bharat IV vehicles, the government will now be buying new vehicles, which was barred earlier.
  • Slashed corporate tax: It has been lowered from 30% to 22%, which together with surcharge and cess would amount to an effective rate of 25.2%. For new companies, the rate has been kept at 15%.
  • Tax Incentives: The Central Board of Direct Taxes (the CBDT) has provided in a recently issued notification, that an investment fund set up by a Category-I or Category-II Foreign Portfolio Investor (FPI) registered with the Securities and Exchange Board of India (the SEBI) need not satisfy the investor diversification conditions stated in the ITL to qualify as an EIF.
  • Additionally, the CBDT has specified the list of countries in which the investment fund should be established, incorporated or registered to be eligible for benefits under the safe harbor regime.
  • Recapitalization:The government on Friday announced a fresh capital infusion of about $10 billion (Rs. 70,000crore) into debt-burdened state banks and credit guarantees to support shadow lenders in a bid to boost lending and revive the economy.
  • SME payments: SME payments are to be streamlined with a one-time settlement plan in place and the government is to ensure that it makes its payments on time for projects (over Rs 40,000crore is stuck in the pipeline).
  • FDI measures: The FDI rules now give single brand more breathing space in terms of local procurement and setting up of physical structures. Also, 100 per cent FDI through the automatic route in coal mining and related activities has been permitted.
  • As has 26 per cent FDI under the government route for uploading/ streaming of news and current affairs in digital media. However, these rules take time to work out and one does not expect to see a flurry of capital flows.

Policy paralysis to policy vacuum:

  • The previous United Progressive Alliance government was characterized by policy paralysis in its second term. Rural India suffered from this policy paralysis and the weak monsoon.
  • Now this government seems to be operating in policy vacuum. Policy Vacuums occur when there is an absence of specific policies relating to a specific situation. Often, either no policies for conduct in these situations exist or existing policies seem inadequate.
  • The indifference towards the rural economy is part of a larger political economy framework that successive governments have followed after the 1991 economic reforms.
  • As it remains important for political mobilization, governments only tend to remember it just before elections to patronize voters through loan waivers, cash transfers or increased subsidies.
  • There has hardly been an attempt to examine and correct imbalances in input and output prices, market structures, access to credit and other measures of support from the government, most of which are stuck in the same policy and economic structures that prevailed in the 1980s.

India’s Rural Economy:

  • It is important to underscore that India’s growth story is fuelled by agricultural productivity and rising rural incomes.
  • This year, however, erratic monsoons meant many farmers were unable to reap their crops such as wheat and soybean on schedule. This rendered much of the agricultural labour unemployed. 
  • Such falls in demand for consumer products tend to trigger vicious cycles resulting in unemployment in other sectors and further reductions in purchasing power and sales.
  • The Indian government must realise that 45 per cent of the demand for consumer products comes from rural India. It should, therefore, focus on reviving the rural economy first.

Conclusion:The government took some of the strong measures to revive the economic slowdown. However, it still forgot the more than half of the population residing in rural India. The falling demand can be revived not by just taking supply side measures but the government should focus on generating demand in rural India as well.

Government needs to focus on the following measures as well:

  • Public employment: It should raise public employment by filling all vacant sanctioned posts in the Central and State governments, which would be around 2.5 million jobs.
  • Regularize other employments: The government should also regularize contract, casual and “honorary” jobs and make them regular jobs. 
  • Human capital formation: improving on skill development will give a big push to start-ups and MSMEs.
  • Focus on labour intensive sectors: The government should also focus on promoting labour intensive sectors such as gems and jewellery, textiles and garments and leather goods.
  • Increase public expenditure in agriculture: government should increase investments in infrastructure, inputs, extension, marketing and storage and training and in providing profitable prices to farmers. 
  • Government should also raise funds for the Mahatma Gandhi National Rural Employment Guarantee Act to push up demand by following a Keynesian approach.


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