The economic headlines of India have not been very soothing in the recent times.The Five percent figure for GDP growth rate has been seen after a long time and there is a possibility that the future may not be much better than the present.India is entering into what is called a ‘Classic middle income trap’.The slump in automobile sales is an indicator of how India has miserably failed to expand its middle class.The incomes of average Indian have got stagnated and as a result, the great Indian consumption story is falling apart.Further, the slowing growth in world’s second most populous country means that inclusion in growth has not really happened on the ground.India’s current slowdown is a result of stagnation of income in both rural and urban areas alike which has further decreased the demand in the economy.
The free market economists would argue that slowdown of demand will automatically reduce the prices to catch up with the demand.However, if that was the case, there would have been no recession at all till now.But both ,recessions and depressions, are now accepted as an economic reality.The recession inevitably leads to a liquidity problem.First, the demand falls, then the production falls and finally, the credit growth falls .Once the credit falls , the shrinking of economy starts and the economy becomes risk averse.A careful study of history reveals that there is no possible solution to the problem of recession but for the fact that government has to take up the role of capital provider.The Keynesian economics is what remains the most significant anti-dote to recession.
Keynes stated that when economy is bad, the government needs to spend more money so that demand is created in the economy.The government has the advantage of printing more money and run more than average fiscal deficit in order to create supporting demand in the economy.The United states under F.D. Roosevelt followed similar diktat by taking up many infrastructure projects like Tennessee valley projects in order to facilitate ease of business as well as ramping up the demand.The nature of public expenditure that has to be done in order to tackle recessionary trends is of crucial significance.The public expenditure has to be done in projects which are likely to bring higher overall dividends for the economy and increase the general productivity level of the economy.
Speaking in terms of expenditure, CAP-EX (Capital Expenditure) remains much more productive than the OP-EX(Operating Expenditure).Capital expenditure focuses on creation of new assets like road , factories, refineries which can bring positive cash-flows in future to the economy.On the other hand, the classic example of operating expenditure is a pay commission.A pay commission comes and raises the staff costs without any increase in corresponding productivity levels.The results is high inflation because people are now ready to pay more price for the existing quantities of products as they have more money in hand.Therefore, clearly such an expenditure may be an organisational necessity but not a solution to tackle economic headwinds.The government must avoid such pumping of money and instead, increase the capital order book by initiating new projects.
The acts like FRBM (Fiscal Responsibility and Budgetary Management) call for zero revenue deficit and fiscal deficit at three percent but the successive governments have fallen short of achieving the above targets. However, in present situation the government will have to religiously follow the target of zero percent revenue deficit while fiscal deficit deadlines should not be stressed too much till they are being used in infrastructural projects of high financial significance.The economy needs a dose from government as the private sector is not able to ramp up investment due to issues of liquidity as well as slowing down of demand.The government intervention has to eventually come and government should as early as possible formulate a qualified response to deal with the situation.
There are several measures available with the government.Firstly, it should give targets to public Maharatna and Navratna companies like ONGC, SAIL to increase their CAP-EX as they have a general habit of sitting on cash.Secondly, a dedicated pension fund management is required in order to reduce OP-EX of the government organisations.The government needs to create pension corpus to fund the pension liabilities while cleaning off the same from the balance sheet of government organisations.Thirdly,Government should combine ‘Skill India’ with ‘Work India’ where the youngsters are encouraged to take jobs that are available rather than measuring them through educational framework only.The high unemployment levels among educated clearly indicates that Indians are still very choosy when it comes to work.However, the time may not allow us choice till we build on the existing opportunities.
The government should not shy from taking proactive steps in order to stem the slowdown because if the spiral once starts even the governments response may become ineffective.Thus, Government should provide a cohesive response by creating an atmosphere of policy certainty as well as by infusing capital in the economy so as to pick up the demand.The private players cannot be expected to ramp up investment as their situation is already very grim.Thus, while Keynesian economics may not be that fashionable but still it may suit the needs of the government in India.The delay in adopting the same should at best be avoided.
Your blogs need a bigger audience, Keshav.
thanks for your kind words bro…