Open Forum
New Delhi, 28
September 2022
Economic Recovery
DEMAND, PVT INVESTMENT LOW
By Dhurjati Mukherjee
Economists are debating economic recovery, but the scenario
is not all that encouraging as there are concerns about toughening conditions
in the forthcoming months. There are hard realities that need to be tackled for
achieving the desired growth expectations. Consumption growth has not picked up
while private investment too is lagging.
Meanwhile, the already high inflation, around 7 percent in
August up from 6.71 percent in July, got a fresh impetus from a sharp energy
shock and rocketing food prices as a result of which real GDP grew at the same
rate as that of inflation. The global situation is neither congenial with energy shocks continuing to radiate
to other prices and major central banks deciding to significantly raise rates
to restrain inflation. Even though it is reasoned that the Indian economy isn’t
as exposed and grows on the strength of domestic demand, it cannot escape the
consequences of global economic woes that still exist and also despite the
country’s advantage of lesser foreign demand dependence than many other
emerging market economies.
Recently, Finance Minister Nirmala Sitharaman too expressed
concern about the industry holding back
from investing in manufacturing, even though foreign investors are showing
confidence in India. She said the Centre is willing to engage with industry and
take policy action. Countries and industries abroad, she added, think India is
the place to be in now and this is reflected in FDI and FPI inflows and
confidence among stock market investors. “Post pandemic, India is coming up
with so many out-of-the-box solutions…We are willing to have our digital
platform become interoperable between countries to enable cross-border
transactions”, she assured.
Delving into the matter, it can be discerned that apart
from investment the trajectory of domestic demand is also not smooth. Private
consumer spending, which has recovered insufficiently with significant damages
at the bottom-of-the-pyramid, is likely to hurt some more by the weakening of
exports, inflation and costlier funding. Indications of uneven recovery have
persisted into this quarter and could extend ahead. As is generally agreed,
sustained growth depends mainly on a revival of capital investment by the
business sector but unfortunately while there’s improvement in health of the
financial sector, investment to the growing needs is not forthcoming.
It remains to be seen if the lower income segments get back
on their feet without government help. This brings into focus the role of
government spending, which has been prominent in supporting the economy
throughout the pandemic. In a worsened configuration, however, the capacity to
expand its scope of growth support is severely circumscribed by inflation,
elevated public debt and a spare fiscal situation.
Though the RBI has been monitoring monetary policy to rein
in inflation, the implications are that macro-economic policies can no longer
replace the private growth drivers in any significant measure. There are
expectations that the bank may again hike rates by another 25 to 50 points at
its next meeting. There has to be solid evidence on consumption recovery such
that it draws in new investments but this is yet to be seen.
There is also a need to consider the condition of daily
wagers. Some reports have indicated that labour work is scarce while wages are
dropping, leading to indebtedness. It’s the combination of factors that could
be contributing to the rising death of daily wagers. The recent report of the
National Crime Records Bureau (NCRB) data showed that one in four suicide cases
during 2021 was a daily wage earner; that is of 1.6 lakh suicide cases reported
in 2021, 42,004 were those of daily wagers. The share of daily wagers dying by
suicide has increased from 12 percent in 2014 to 25 percent in 2021.
Many social scientists believe that lack of jobs in the
informal sector along with inadequate wages and high food inflation have
affected people who have been hit the hardest. Even the building of highways
and roads across the country has been hit with the pace of construction falling
by 15 percent between April and July this fiscal.
As capital flows are a function of relative growth
prospects and relative interest rates, if the global economy recovers and
Indian economic growth also rebounds, the outflows would be more forthcoming. “Similarly,
whether rising interest rates in the United States lead to outflows depends on
the trajectory of Indian interest rates as well,” an economist recently pointed
out. Large domestic pools of savings and capital can help offset any capital
outflows.
But considering the huge requirement of resources to boost
the economy at such a juncture, insufficient funds are a huge drawback.
Meanwhile, Fitch Ratings slashed its India growth forecast for the current
fiscal to 7 percent from 7.8 percent previously, citing elevated inflation
levels and higher interest rates as it joined other agencies in reducing the
forecast. It also forecast lower growth of 6.7 percent in 2023-24. However, it
needs to be pointed out that both these forecasts may witness a further
downtrend.
While it cannot be denied the economy is moving in the
right direction, the growth momentum is lacking. This is principally due to the
fact the lower segments of society, specially the economically weaker sections,
do not have adequate purchasing power and food inflation has affected them
badly. Only talking of the size of the economy without bothering to know the
living standards of the masses has possibly no economic justification.
The thrust has to be given on job creation and a sustained
manner of development. In this connection Prime Minister Modi’s focus on khadi
and seeking to take it to the global market is a step in the right direction. Moreso,
asBangladesh has emerged as a leading exporter of textiles when India has far
more potential and expertise.
It goes without saying cottage and village industries need
to be encouraged in a big way and some Indian brands popularised at both the
national and international levels. A concrete plan of action with specific
targets needs to be put in place. Apart from traditional exports, there is need
to focus on various types of cottage industries, specially handicrafts, and
promote these in a big way.
The economy has to bounce back, but it cannot be measured just
by GDP growth. There has to be grass-root development, where the focus needs to
be on the rural and semi-urban sectors and the people who live there and
struggle for an existence. The government has to prepare an action plan for
upgrading the conditions of those who work in the informal sector, attract more
people to go in for self-employment, emphasise on branding and value addition
and giving a thrust to exports. As is well known, there is a widening gap
between exports and imports and this needs to be narrowed down.
Finally, in tackling the emerging challenges,
simultaneously through enhanced government investment -- even through deficit
financing -- the private sector should be persuaded to invest more in
innovative manufacturing and exports. As rightly pointed out by the Reserve Bank
of India in a recent article, “monetary policy has to perform the role of
nominal anchor for the economy as it charts a new growth trajectory”.---INFA
(Copyright, India News & Feature
Alliance)
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