The fact that consumption has held up so far has its roots in the diminishing savings of the households
The economy is often likened to a plane running on four engines – consumption, investment, government spending and exports. Over the years, the three engines of the Indian economy defaulted and the economy spluttered along a single engine - consumption. The consumption has been playing a huge role in supporting growth in recent years. However, now even this last standing soldier seems to be faltering after being burdened by rural distress and blows to the informal economy caused by Demonetization and hastily implemented GST, not to mention the lack of jobs as well.
The fact that consumption has held up so far has its roots in the diminishing savings of the households. As per the latest report released by Central Statistics Office (CSO), the household savings as a percentage of GDP in the Indian economy in 2018-19 has slumped to its lowest level in the last 15 years from a high of 23.6 percent in 2011-12 to 18.2 percent in 2018-19. Simply put, over the years, people started spending a higher portion of their incomes to fund their daily expenses. And when incomes didn’t prove sufficient, they started to borrow more to consume. This model suffered a blow after the NBFC crises of 2018-19 when banks and shadow banks became risk averse to lend.
Now the broader question is, “Is this model of consumption and economic growth sustainable?”The answer to the question has been answered by the Reserve Bank of India itself. The Central Bank in its Annual Report 2017-18 concluded that “Consumption led growth can arguably lead to slackening of future growth if it entails growing imbalances due to limits to capacity creation and rising debt burdens, particularly for households. The Bank further went on saying that Consumption led growth did have a negative impact on consumption growth one year ahead.”These results corroborate the imperative for a judicious balance in the growth drivers for non-disruptive and sustainable long term growth ahead. Unfortunately, with consumption being the only growth driver for the economy, the judicious balance has been lacking for quite some time now.
What’s more, the government consumption itself has been playing a huge role in supporting growth in recent years. The government’s estimates for 2019-20 put the share of government consumption in GDP at its highest level since 2000-01. No wonder, the fiscal deficit targets are being breached. With government’s resources drying up combined with difficulty in raising more resources, the government’s balance sheets too are now being stretched. It’s no surprise that it’s now the turn of Reserve Bank of India to expand its balance sheet to prop up growth.
If the economic slowdown wasn’t already enough, there is now the added threat from the outbreak of Coronavirus. Already, the death toll from this pandemic has exceeded that of SARS (Severe Acute Respiratory Syndrome) which hit China in 2002. The threat manifests itself in the global economy in several ways. For instance, the effects of the Coronavirus outbreak are likely being seen on global food prices. The FAO Food Price Index, maintained by the Food and Agriculture Organization rose for the fourth straight month. In January 2020, the index rose by 11.3 percent over a year ago and by 0.7 percent over a month ago. Cereals, dairy and sugar prices all rose as market conditions were conducive for strengthening of prices. The steady uptrend in food prices is a phenomenon visible in India too. If this trend is maintained in much of 2020, then it will be a situation where farmers should earn more from the farm but it may also feed into general inflationary expectations. If 2019 was a year when very low inflation seemed like a problem, then 2020 could present an opposite problem. The RBI’s Monetary Policy Committee too has an eye on inflation, even as it maintains an accommodative policy stance.
Furthermore, the Coronavirus is threatening to disrupt the global supply chains. China accounts for a minimum of 20 percent of intermediate goods imports for most Asian economies. India is not far behind with close to 15 percent of such imports from China. If the situation is to worsen, the immediate damage to the world economies including India is likely to be meaningful. Therefore, a lot depends on how the outbreak is contained in the near future.
There is a need for bold reforms from the government’s table. The recently announced Union Budget hasn’t been able to lift sentiments to say the least. Though the reduction in the corporate tax rates recently announced by the government augers well for reviving private investments, the government’s effort to simplify the personal income tax structure hasn’t been able to impress the markets. The government of the day should actively consider making tax regime simpler and effective to give boost to consumption while setting course for increasing its own revenue.
At the same time, enough thrust should be laid on meeting yearly disinvestment targets to keep the fiscal deficit under check. For this year, the government has set an ambitious disinvestment target of 2.1 lakh crore, much of which is being envisaged to be shouldered by listing of Life Insurance Corporation on Indian bourses.This story is being tracked very closely by the foreign fund houses and government wouldn’t want to take any chances considering the fact that there are apprehensions that there may not be enough liquidity in the markets to absorb such large issue or that the Indian stock market may not have matured enough to handle such a large offering.
There is a need to give boost to rural spending by focusing government resources more to rural areas. Further, the government must ensure timely disbursement of installments to farmers under Pradhan Mantri Kissan Samman Nidhi Yojna as the scheme has immense potential of improving their spending capacity.
Last but not the least, the government should continue on its path of making ‘ease of doing business’ a reality. This becomes more relevant now given the fact that global corporates and firms would be looking to invest in India after the recent corporate tax rate cut.
(Author is Pursuing Post Graduation in Public Administration)