Domestic private consumption accounts for approximately 55-60% of India’s GDP, which is why India remained largely unaffected by the GFC (Global Financial Crisis) in 2008. It was showing strong signs of growth when major economies were facing several hardships. Some years later, due to a drastic fall in consumer demand, the economy plunged into a standstill which eventually led to stagflation. Frequent lockdowns and the rapid spread of COVID-19, worsened the economic scenario.
Since India is a net importing country, this situation arose with the fall in domestic consumption and there are several reasons responsible for that.
To begin with, there has been excessive volatility in oil prices due to constant tensions in the Middle East and our excessive dependency on imports. Adding to this, oil is outside the purview of GST, so the union and state tax it at their whims and fancies. Also, there is a lack of quick transportation and proper infrastructure. All these results in delay and lead to high prices of goods and services by the time it reaches the consumers. This supply-side inflation can also be due to a shortage of raw materials.
Our country has been exporting raw materials and importing finished goods at a premium for a long time to suffice our needs, thus draining our forex reserve. This has happened as we skipped the industrial sector transition and directly jumped on from the agricultural sector to the service sector.
A report presents the rising income inequality among the population where the rich 1% generates ~23% of the total income whereas the bottom 50% generates a mere share of ~11%. This suppresses the demand potential of the bottom 50%, as a rich person can’t eat a poor person’s share too.
With the adoption of technology by various companies, there has been job loss of people who perform repetitive and skill-less tasks. And in an industry these people happen to be the majority, leading to large-scale unemployment.
The out-of-pocket expenditure on health is about 50% in India, especially among the rural poor. This makes people suppress their needs to stay alive. Those who compensate and try to do it otherwise, fall into the following vicious cycle, which continues for generations.
To increase our economic potential, several steps have been taken by RBI and the union and state governments. RBI has decreased the repo rate to discourage people from holding money in their bank accounts. SLR (statutory liquidity ratio) has been decreased to disincentivise banks from parking money. Several sectors have been included in PSL (Priority Sector Lending). NARCL (National Asset Reconstruction Company Limited) has also been set up to clear the balance sheets and free more expendable capital in hands of the bank.
In this union budget, the government has tried to support the transportation and logistics infrastructure with the seven pillars of PM Gati Shakti and using drones as a service. These would increase penetration of goods and services to the grassroots and in difficult terrains within no time. The government has also tried to address the excessive volatility of oil by blending oil with 10% of ethanol, creating of three strategic reserves and introducing a battery swapping policy for electric vehicles.
Despite being claimed to be progressive in nature, there is a need for tax reforms to reduce income inequality. Indirect taxation applies equally to all the varying sizes of pockets of people. So, there is a need to recheck the commodities in the basket of luxury items.
For getting employment, the government has planned to instill skills and quality education in the people by using DESH (digital ecosystem for skilling and livelihood) stack e-portal and digital university, where anyone can gather education from any corner of the country. This would create high-value jobs and thus higher incomes. It can also be used to gather a premium for the exports of finished products.
There is also a need to tap into our demographic potential and prevent it from brain drain. The government has recently taken a step to rationalize education by launching the NEP (New Education Policy). This would incorporate vocational training along with studies for better practical knowledge, thus helping students to not only get jobs but also create jobs.
In the last Financial Year, labor reforms recognized the gig economy and provided the workers with social security. This would make the gig economy attractive to the people. The government also focused on NIP (national infrastructure pipeline) and Ayushman Bharat Yojana. This would address the issue of out-of-pocket expenditure on health. This year, there has been an increase in the allocation of funds for this scheme. Tax holidays have been extended to prevent MSMEs from going bankrupt and also prevent further job losses.
India is also trying to control the spending of Forex (Foreign Exchange) reserves on essential imports by rolling out PLI (Production Linked Incentive) scheme in 13 different sectors for incentivizing manufacturers to make in India.
The above-mentioned steps would create employment and once it starts delivering, the results would generate a circular economy, where more production would create more employment and enhance people’s purchasing power.
Government should also launch Universal Basic Income (UBI) for all adults. It has been run on a pilot basis by Nobel Prize winner Abhijit Banerjee and now, it is fully operational in Sikkim.
Government should go for both the short-term and long-term approaches simultaneously, where UBI will create demand till the time the manufacturing sector establishes itself, helping us to achieve the target of a $5 trillion economy within the Amrit Kaal. With growth and equality among all people and sectors, India will reclaim the ‘sone ki chidiya’ title, again in the long run.