|Demand of the question |
Introduction. Contextual Introduction.
Body. Reason for economic slowdown. Are tax sops enough to accelerate the economy?
Conclusion. Way forward.
Indian economy is facing slowdown in recent times. This has created a panic environment in the environment and the government officials. There are structural issues in land, labour, agricultural marketing which need to be addressed and is being ignored that need urgent attention. Various steps like tax concessions being taken in hope to boost economic growth that may not help in long turn.
Reasons for slowdown of economy:
- Crisis in agriculture: There is a crisis in agriculture that runs deep. GDP per capita in the agricultural sector has been less than one-tenth GDP per capita in the non-agricultural sector for 25 years. Growth in output is monsoon-dependent. Employment creation is negligible. The outcome is rural distress.
- De-Industrialisation: The share of manufacturing in GDP and employment is lower than it was 25 years ago. India’s share in industrial production and manufactured exports in the world economy has declined steadily. The beginnings of de-industrialisation are discernible.
- Exports: The exports have reduced in recent times. The US dollar value of merchandise exports stagnated during the last three years.
- Consumption: Private consumption contributes nearly 55-60%, to India’s GDP has been slowing down. While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with collapse of food prices has taken a heavy toll on rural consumption.
- Investment: Gross Fixed Capital Formation (GFCF), a tool to measure investment in the economy has declined from 34.3% in 2011 to 28.8% in 2018. Similarly, in the private sector, it has declined from 26.9 per cent in 2011 to 21.4 per cent in 2018. The household sector, which is the biggest contributor to the total capex in the economy, has lost steam since demonetisation.
- Failure of the Insolvency and Bankruptcy Code (IBC): IBC has met limited success. It has been unable to resolve insolvency Cases in a time-bound manner. Therefore it has led to limited resolution of Non-performing assets and cases.
- Rising global trade tension: Recent trade war between USA and China and other global trade wars has impacted growth all over the world. It has impacted manufacturing and exports in different parts of the world, impacting Indian economy too.
- Unemployment: Unemployment is all time high and has impacted the buying ability of individuals. Usher of new technologies, bad policies and inability of manufacturing sector to boost up the growth has impacted the overall growth of the country.
Are tax sops enough to accelerate the economy?
- The recent announcement of tax sops for big corporates are not enough as it is only a short term measure.
- A credible export agenda requires policy interventions that lie outside the domain of the commerce ministry. These include improvements in infrastructure and logistics, building coastal employment zones, better bank finance for exporters, and most important, labour law reform.
- Slowdown is mainly due to fundamental deficiencies and thus need grass root actions. Issues such as labour reform with a strong political effort is necessary.
- If there is a slowdown or downturn in an economy, governments should use counter-cyclical, expansionary, macroeconomic policies to revive growth.
- Fiscal policy should provide a stimulus, preferably by stepping up public investment. Monetary policy should provide a stimulus to private investment by lowering interest rates.
- Under the current macro environment, monetary policy seems to be less effective than fiscal policy as ‘improper transmission mechanism’ fails to pass on benefits to the real economy.
The global economy is undergoing a crisis and has weakened significantly. It is extremely volatile at this stage, investor’s confidence across the globe has fallen sharply and downside risks are emerging each day. So the government should take appropriate measures to improve the credit cycle through investment and savings and promotion of foreign investment will bring the economy from slowdown in future.