Context: Economic Slowdown and revival of consumer confidence.
More in news:
- Former PM Manmohan Singh says ‘palpable climate of fear’ is stifling economic growth & could end up causing stagflation.
- Nominal GDP growth is at a 15-year low
- Unemployment is at a 45-year high
- Household consumption is at a four-decade low
- Bad loans in banks are at an all-time high
- Growth in electricity generation is at a 15-year low
Nominal and Real GDP:
- Nominal GDP: the market value of the final production of goods and services within a country in a given period using that year’s prices (also called “current prices”).
- Real GDP: nominal GDP adjusted for changes in the price level, using prices from a base year (constant prices) instead of “current prices” used in nominal GDP; real GDP adjusts the level of output for any price changes that may have occurred over time.
- With both the private consumption growth and investment rate dropping below 5% in Quarter 1 of Financial Year 2020, the GDP growth rate has fallen to 5%. Nominal GDP growth has slid to 8%, a record low.
- Both nominal GDP (includes inflation) and real GDP grew at the slowest-ever pace since the NDA took charge in 2014. Nominal GDP is a proxy for income growth, especially that of corporate. A slowing nominal GDP will eventually lead to low tax collections. The government estimated a 11% nominal growth in the Union Budget and over 15% of tax revenue growth.
From 12.1% growth in April-June 2018 to 0.6% in April- June 2019, the manufacturing sector experienced the biggest slowdown. This is the lowest growth in the last 6 years (barring q1 FY2018, when it shrunk because of destocking before GST implementation). For the fourth straight quarter both “mining and quarrying” and “agriculture, forestry and fishing” have grown at less than 5%.
For a while now, the rest of the sectors have had growth rates within the 5% to 10% band. In Quarter 1 of Financial Year 2019, construction sector, an employment-intensive sector apart from manufacturing, slowed down to a seven-quarter low (5.7%).
Both Private Final Consumption Expenditure, which reflects consumption and Gross Fixed Capital Formation, which reflects investments, fell drastically in the latest quarter. Private final consumption expenditure (PFCE) accounts for more than 55% of GDP and Gross fixed capital formation (GFCF) accounts for 28 to 30% of the GDP.
How Consumer confidence affects economic growth:
- If the consumer confidence is high, the consumer will spend, the businesses will invest and the government will earn higher taxes, which it can spend on its programmes.
- As per the Reserve Bank of India, the consumer confidence in September 2019 was at a six-year low. This is clearly reflected in the economic indicators.
- Market-based economies thrive on hope and belief of profit by private entrepreneurs. In the times of negative market sentiments, the government increases its expense to bring back hope.
- The premise of the government’s policy framework seems to be that economic participants have mala-fide intent unless they can prove otherwise. This suspicion that every industrialist, banker, policymaker, regulator, entrepreneur and citizen is out to defraud the government has led to a complete breakdown of trust in our society.
- With the erosion of trust, there is a lack of a support system for people to seek refuge against unlawful tax harassment or unfair regulations.
- This makes entrepreneurs lose their risk appetite even further for undertaking new projects and creating jobs. This toxic combination of deep distrust, pervasive fear and a sense of hopelessness in our society is stifling economic activity, and hence, economic growth.
What should be done?
This slowdown can only be reversed if both short-term and long-term reforms are undertaken.
- Twin policy action of boosting demand and reviving investment: Perilous state of fear (among industrialists, bankers and policy makers), distrust and lack of confidence among citizens is a fundamental reason for our sharp economic slowdown. Twin policy action of boosting demand through fiscal policy and reviving private investment through ‘social policy’ will inspire trust and confidence.
- Immediate steps required:
- Give auto sector incentives to invest and shift to electric vehicles
- Incentives to auto sector employees to upskill on electric vehicles
- Change GST collection to quarterly for companies below Rs 1 crore
- Reduce the GST slab rates
- Adopt the Direct Tax Code, cut income tax for the bottom slab
- Improve credit flow to both consumer and industry
- Reduce real interest rates by 135 basis points as cost of capital has to come down
- Change the credit culture in public sector banks
- Stimulus should drive investment, up skilling for displaced employees
- Factor market reforms, including bringing the cost of land down.
- Strengthening the manufacturing industry and increasing domestic demand are key imperatives: Some of the steps that can be taken to generate demand are listed below:
- 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.