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Reviving consumption demand for economic growth 

Synopsis- Expenditure side of National Income is showing signs of stress. The government should try to revive the consumption side to return to the growth path. 

Introduction 

  • The first advance estimates of GDP growth for FY21 is more optimistic than the projections provided by many institutions, global and domestic.  
  • However, the figures still have a substantial chance of uncertainty as the source of data is not reliable [Very little up-to-date primary information is available for the estimation]. 

What are the areas of concern?  

On the expenditure side, except for government final consumption expenditure, alternative drivers of demand are down sharply. Non-Public Consumption Expenditure is predicted to contract 9.5 per cent while capital formation has contracted by 14.5 per cent, with imports and exports also contracting. 

The economic performance was dented by sharp de-growth in the following three sectors- 

  • A sector-wise breakup of data for FY21 shows the sharpest fall in trade, hotels, transport, communication, and broadcasting services at 21.4 per cent from 3.6 per cent growth last year.  
      • This is followed by 12.6 per cent contraction within the construction sector as against a growth of 1.3 per cent last year. 
  • Manufacturing is declining by 9.4 per cent in 2020-21 from 0.03 per cent growth last year. 

The estimated losses in these three sectors account for 93.5 percent of the total loss for the whole year. Hence, fiscal policy needs to focus on priming demand to return to the trend growth path. 

What policy interventions are needed to increase consumption? 

  • First, Government should focus on enhancing credit flows to the small and marginal farmers
      • KCC (Kisan Credit Cards) constitute 60% of Major outstanding bank credit due to COVID and Agri stress.
      • To encourage consumption among farmers, interest payment by farmers should be sufficient for their KCC loan renewal.
      • It may result in a reduction of the NPA of the banks from KCC.
  • Second, the government should try to mainstream the tenant farmers
      • There are almost 3-4 crore tenant farmers, not receiving PM-KISAN benefits.
      • The government should try to formalize the credit delivery to tenant farmers by issuing tenancy certificates on the line of Andhra Pradesh.
      • Another way is the formation of SHGs to enable formal lending.
  • Third, waive tax on Senior citizen saving scheme The government should make SCSS interest income to be tax-free. 
  • Fourth, Launch Adopt-a-family scheme– The scheme is voluntary and taxpayers with income up to over Rs 10 lakh could be incentivized for supporting a BPL family for a year. The government can incentivize taxpayers with around Rs 50,000 tax deduction apart from exemption offered under-80C 
  • Fifth, take the following steps to bring more FDI and increase Ease of Doing Business rankings; 
      • Withdraw all tax appeals. 
      • Accept all domestic arbitration decisions against government departments/agencies 
      • Clear above outstanding dues within a stipulated time. 
  • Sixththe Government should increase investment in the health and education sectors;
      • The government can introduce a medical savings account.
      • Interest earned by the depositor can be deducted by government to provide the person with Mediclaim policy.
  • Lastly, the government should bring down its stake in state-owned banks to less than 50 percent.

Way forward- 

By fulfilling these criteria, India can improve its position on the Ease of Doing Business ranking.

 

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