From a peak of 8.1% in the fourth quarter of 2017-18, growth in gross domestic product (GDP) has now decelerated to a six-year low of 5% in the fiscal first quarter, with a slowdown visible across all sectors. We now require a macroeconomic strategy to revive aggregate demand in the short-run, while initiating structural reforms to sustain growth over the long-term.
Response by Government –
- The measures the government has announced are largely in response to demands of specific interest groups such as foreign portfolio investors, real estate companies, automobile companies, etc. These have mostly been piecemeal supply-side interventions, which may help these specific interest groups but won’t reverse the collapse in aggregate demand.
- The Reserve Bank of India (RBI) has repeatedly cut the repo rate to revive demand and has also taken other measures to ease the availability of credit. However, in real terms the policy rate is still rising and there is a lack of credit demand in some segments and credit exposure limits in others.
- With limited traction for monetary policy, the burden of growth stimulation must fall mostly on fiscal policy. Here, the unrealistic assumptions of the 2019-20 budget are quite worrying. It has been assumed that tax revenue and total revenue will grow by 25.3% and 25.6%, respectively, though they both grew by only 8.9% in 2018-19.
What needs to be done?
- Clearly, the 2019-20 budget will have to be substantially revised in the winter session of Parliament or earlier to arrest the crisis. In fact, tax policy has already been revised after the budget, with a large reduction in corporate tax rates. The impact of an increase in government spending would be direct and fast, especially if it puts more money in the hands of poor consumers who have a high propensity to consume. That would have a strong multiplier effect, and this should be the guiding principle for an inclusive fiscal strategy to revive growth.
- Extraordinary conditions call for extraordinary measures. Deep fiscal reforms could create enough fiscal space to substantially increase pro-poor spending and revive growth while reducing the fiscal deficit; all this without raising tax rates. Fixing the GSTN on a war footing, paring down tax exemptions and rationalising subsidies can free up fiscal space to the tune of 6-7% of GDP.
Distribution is the key –
This can be used to finance an inclusive growth revival strategy with three components.
- First, building on the PM-Kisan programme. There is a merit in extending the ₹6,000 income support per farmer to all citizens, which would cost 1% of GDP. This income support could be increased to ₹12,000 per citizen per year, doubling the cost to 2% of GDP. This support could grow with the economy.
- Second, education, health and infrastructure are all underfunded. Additional funding of 1% of GDP could be provided to each of these.
- Lastly, the remaining fiscal space could be used to cut the fiscal deficit.
Source – Livemint
QUESTION – A crude economic growth cannot resolve the contradictions of Indian economy. The slowdown needs a distributive approach of economic development. Discuss.