Case for consumption boost

Author: 
Nilanjan Banik

India is perhaps the only large economy in the world which is growing at a 6.5 plus per cent, and yet this growth rate is not supported by some fundamental micro and macro-economic indicators. The million-dollar question these days is can India sustain its rapid economic growth.  Importantly, in this phase of de-globalization, and disruption post-demonetisation, it will be a miracle if India can achieve a 7 per cent growth. President Trump has already signed an executive order to pull USA out of Trans-Pacific Partnership deal.

In India, common man in the street, and small and medium size entrepreneurs will vouch for a fall in overall demand. Some market pundits will echo similar sentiments by citing some micro-level data. There has been a fall in car, two-wheeler, and cement production. Exports are down and so are imports. In fact, service PMI (purchasing managers' index) tracking sales, employment, inventories, and price data of private service sector companies has shown a sharp decline in recent months. Service is the most important sector, contributing to 67 per cent of India's national income. The pessimistic business outlook is also reflected by a fall in foreign direct investment. And, all these have contributed to a fall in overall demand.

There are five components of demand, namely, consumption expenditure, investment expenditure, government expenditure, exports, and imports. The most important component of demand is consumption expenditure, explaining 70 per cent of the national income in 2016. Generating and sustaining income would therefore call for strategies that would generate income.

Although the consumer spending data has shown a tepid increase the bug lies in agricultural income, supporting livelihood of around 60 per cent population. However, recent data (considering one data point) can be an anomaly. It may be because of disruption caused by demonetisation. Therefore, it makes sense to look at five year long average data (capturing the trend) for these indicators.

Long term trend suggests, India's growth story is kept alive through higher government expenditure. Most part of government spending is because of implementation of government programmes and maintaining various government departments. Recent estimate shows GDP from public administration has now surpassed the GDP from the agriculture sector.

Not all aspects of government spending are bad. It makes sense to spend on infrastructure.  Make in India project, that is, incentivising manufacturing in India, will not be possible without having world class roads, ports and railways. And one has to give credit for government increasing fund for building infrastructure sector. Part of this is reflected in higher steel and cement consumption over years.

However, money spent on maintaining too many government departments is unworthy. For instance, department of sericulture can be merged with agriculture, higher education under science and technology, etc. At the time of e-governance, better delivery of public services can happen through a leaner, thinner and stronger (read, productive and transparent) government department. Also, ornate beautification of roads and public places without providing proper infrastructure facilities is uncalled for.

Sustaining this 6.5 per cent plus growth, and generating consumer demand will also require transferring funds to the poor and the deprived, so that distribution of income becomes more equal. Richest 1 per cent in India own 58 per cent of country's wealth. Around 26.1 per cent of its 1.27 billion population lives below poverty line and 63 million people have been driven into poverty due to high cost of healthcare and education. In this age of 3D printer and data algorithm, when manufacturing process is increasingly becoming mechanized, there is a need to incentivize micro, small and medium enterprises (MSME) sector.

Problem with MSME sector is access to finance. A flourishing MSME sector is much needed for employment generation. India has a growing young population, with two-third of its population below 35 years. Also the need of the hour is to increase investment in rural infrastructure, particularly because we still have to depend on rainfall for robust agriculture output.

There are some talks about giving unconditional cash transfers to the poor. Although at present government budget deficit and inflation are both under control however direct cash transfer is not a good idea. Cash transfer can at most help to create vote bank but not help the masses to sustain their income.  A better idea would be to give incentives for skill-development, and change the existing curriculum in colleges and universities, to make the students more employable.

Likewise, decreasing tax rate to increase demand may not be a good idea especially when a meagre 1 per cent of India's population pays tax. Data indicates there are only 24 lakh people who have income above 10 lakhs. Ironically, Indians bought 25 lakh cars every year since 2011. Decreasing tax rates for sure will increase tax buoyancy but its impact on raising consumption demand is questionable.  There is a need to increase consumption demand. How government does that we will have to wait and see. (IPA) 

Monday, 30 January, 2017