General Studies Paper -3
Context
- Pre-COVID Economic Scenario:
- Before the COVID-19 pandemic, the Indian economy faced severe structural headwinds.
- GDP growth fell from 8.2% in March 2018 to 3.1% in March 2020.
- Growth decline occurred continuously for eight quarters, indicating systemic issues.
- Supply-Side Measures:
- To address this slowdown, the government implemented corporate tax cuts in late 2019, leading to a revenue loss of ₹5 lakh crore.
- The intent was to increase corporate profits, driving investments, employment, incomes, and consumption through a beneficial cycle.
- Pandemic Disruption:
- Before these measures took effect, the COVID-19 pandemic hit, further derailing growth.
- The RBI’s monetary policy was critical in rescuing the economy.
Post-Pandemic Economic Rebound and Recent Developments
- Initial Recovery:
- Post-pandemic, the economy witnessed a burst of demand, termed as “revenge consumption”, fueled by pent-up savings.
- Monetary policy remained accommodative, enabling production to meet rising demand.
- Recent Slowdown (2024-25):
- Second-quarter GDP growth fell to 5.4%, the lowest in seven quarters, compared to 8.1% a year ago.
- Manufacturing growth dropped to 2.2%, and export growth stagnated at 2.8%.
- Macroeconomic Indicators:
- Private Consumption: Growth fell to 6% in Q2 FY24.
- Government Consumption: Rose marginally to 4.4% but remains low compared to previous years.
- Gross Fixed Capital Formation: Growth declined to 5.4% in Q2 from double digits in earlier years.
- Inflation: Consumer Price Index (CPI) remains above 6%, limiting RBI’s scope for monetary intervention.
- Foreign Trade: Exports grew by 2.8%, while imports contracted by (-)2.9%, reflecting a weak global demand environment.
Structural Challenges in India’s Economic Policy
- Corporate-Oriented Policy Approach:
- Corporate Tax Cuts (2019): Reduction in tax rates aimed to stimulate investments but resulted in significant revenue loss.
- Corporate profits quadrupled in four years, but benefits did not trickle down to workers.
- Banks suffered massive haircuts under the Insolvency and Bankruptcy Code (IBC), reducing debt recovery to 30% of the original loan amount.
- Workforce Issues:
- Increased informalisation and low-wage growth have suppressed demand.
- Wages stagnated while corporate profits rose, as highlighted by the Chief Economic Adviser.
- Outward Investments:
- India’s outward direct investment (ODI) reached $8.9 billion (Apr-Sep 2024), reflecting business expansions abroad.
- Significant investments were directed to Singapore ($2.8 billion), the US ($1.1 billion), and the Netherlands ($809 million).
Judicial Insights and Economic Implications
- Vishaka vs. State of Rajasthan (1997):
- Laid the groundwork for workplace reforms in India, showcasing the importance of institutional mechanisms.
- Kerala HC Judgment (2022):
- Political parties were excluded from being categorized as workplaces, highlighting ambiguities in governance definitions.
- Research Insights:
- Studies (e.g., David Hope and Julian Limberg, 2020) show that tax cuts for the wealthy across OECD nations did not significantly impact employment or growth but widened inequalities.
- This research serves as a cautionary tale for relying heavily on supply-side policies.
Balancing Supply-Side and Demand-Side Measures
- Need for Demand Stimulus:
- The current economic slowdown demands a demand-side policy approach to complement supply-side measures.
- Stimulating consumption through higher wages and employment growth is essential to revive demand.
- Key Suggestions:
- Corporate Profits to Wages: Share corporate profits with workers to boost disposable income and demand.
- Support Informal Sector: Address creeping informalisation and wage stagnation.
- Fiscal Policy Measures: Introduce measures like targeted transfers, increased government expenditure, and support for MSMEs.
- Balance Investments: Encourage domestic investments alongside foreign investments to create employment opportunities.
Global Context and Trade Concerns
- Global Economic Outlook:
- The IMF describes the global economic scenario as “underwhelming,” which could affect India’s exports and foreign trade.
- Sluggish global demand further reduces growth prospects in the export sector.
- Strategic Trade Policies:
- Promote domestic manufacturing and reduce import dependency.
- Boost trade relations with emerging markets to counter global economic uncertainties.
Way Forward
- Shift Towards Inclusive Growth:
- Policies must focus on employment generation and equitable income distribution.
- Higher public expenditure in sectors like education, healthcare, and rural infrastructure.
- Support for MSMEs:
- MSMEs serve as significant employment generators and drivers of local demand. Policy interventions must prioritize their revival.
- Balanced Fiscal Approach:
- While corporate-oriented policies are essential for investments, demand-side measures like wage growth and job creation cannot be ignored.
- Address Workforce Challenges:
- Focus on formalizing employment, ensuring job security, and enhancing skill development.
- Monetary-Fiscal Coordination:
- With inflation limiting RBI’s action, fiscal policy must take the lead in stimulating demand
Conclusion
- India’s economic slowdown stems from structural weaknesses exacerbated by a supply-oriented policy approach.
- Balancing supply-side incentives with demand-side stimulus is critical to achieving inclusive and sustainable growth. As global trade remains sluggish, domestic consumption and investments must become the pillars of India’s economic revival.