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Last Updated : Jan 20, 2020 03:51 PM IST | Source:

Re-looking economic growth through demand side measures

It's a challenge for a government to address the demand both in the short and in the medium term.

Pritish Kumar Sahu

The first eight month of this fiscal (April-November) shows a weak growth of India’s eight core sectors and contracted for the fourth consecutive month in November, recording a flat growth (zero percent) against a growth of 5.1 percent during the same period last year. The decline in five sectors viz. coal, crude oil, natural gas, steel and electricity in November indicates a possible slowdown on the demand side as all these sectors are linked to demand.

This weakening in demand may not be attributed entirely to the domestic demand rather a decline in external demand too. Fall in India’s export shows an indication of reduction in external demand. The merchandise export dipped by 1.96 percent in the first nine months (April-December) of the current fiscal.

But certain development in the recent past seems to be fading away the slowdown that permeated in 2019. These includes the recent revival of the corporate profit in the developed World, announcement of the ‘phase one’ trade agreement between US and China, a marginal improvement in the demand of the consumer durables, waning of the Brexit impact etc.

Given the world economic order today, the slowdown in demand may not be a serious concern but it can’t be ignored either.

Not going much into the reason for such plunge, the demand, particularly the rural demand needs to be improved to bring back the economy into the growth trajectory. This might require more policy easing measures both at the fiscal and at the monetary front. Several countries including China had also taken numerous policy measures such as reduction in reserve ratio to influx $126 billion into Chinese economy and infrastructure building for boosting the employment and consumer spending. Similarly, Thailand also announced a stimulus package of $14 billion for the agricultural sector and European Central Bank had gone for reduction in interest rates to negative 0.5 percent to revive the Eurozone amongst other monetary easing measures.

In fact it is a challenge for a government to address the demand both in the short and in the medium term. The government had taken several measures to revive the demand and boost growth by helping the MSMEs, the housing sector, automobile industry, exports etc.

Alongside, the government had taken various other supply side reforms in the recent past (reduction in corporate tax, bank merger, allowing 100 percent FDI in few restricted sectors such as contract manufacturing and coal, improving the business climate through ease of doing business and other monetary policy measures etc.) to give momentum to the economy which would ultimately address the demand.

The government has also established Rs 20,000 crore funds to help the finished apartment, Rs 70,000 crore for bank recapitalisation, boost lending in 400 districts through Public sector Banks and NBFCs for farming, MSMEs and housing activities, assured income support through PM-Kissan Yojana etc. Despite these measures, the rural attention needs to be accelerated as there is almost stagnancy in agricultural wages and firm incomes. Reports shows, rural demand which contributed about 37 percent to the overall FMCG spending has slowed down in recent periods and the overall rural demand grew at the rate of about 2 percent in the first half of the fiscal.

There is the need to strengthen the food processing and allied industries along with addressing the issues of raw materials, technology to boost the handicraft and handloom sectors. The government needs to strengthen the supply chain, identify the potential new markets and facilitate the export of these products for higher income.

This will not only increase the productivity and incomes but also will strengthen the future generations. Building more rural infrastructures and increasing capital expenditure through government’s infrastructure building programme will increase the rural demand too in the short run. There is the need of taking more structural reforms such as bank clean-up and labour reforms to address the slowdown in the domestic demand, particularly the rural demand.

In the medium term, the efforts to improve the productivity and supporting the employment creation would reverse the slowdown in the domestic demand. Increasing the rural transportation facility and improving the irrigation facility will improve the income in the medium and long run.

Though there is a massive increase in MSP in 2018-19 but the lacuna in the procurement system do not make the farmers to receive the same. The government procurement of rice and wheat procurement by FCI should be efficient enough to increase income and spending power of rural India. Direct stimulus packages such as increasing the PM-Kishan scheme amount from the existing Rs 6,000/annum would also help in boosting

the rural demand. However, the implementation and execution of such schemes should be looked within carefully without putting any extra burden on the taxpayers.

The writer teaches Economics at the Birla Global University- Bhubaneswar and is an external trade consultant to the Commonwealth Secretariat

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First Published on Jan 20, 2020 03:51 pm
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