February 13, 2025

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.
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