Reviving demand is the need of the hour
Mains Paper 3: Economy
Prelims level: PFCE
Mains level: Economic growth and Development
Indian economy there are two major engines for growth
consumption and investment.
Exports are not really our forte and can supplement
though never lead growth. Government spending, though important, can be
inflationary. Therefore the importance of consumption has to be underlined.
In fact the demographics of the country indicate that
there is potential for people to move up the income chain thus leading to
As long as there is upward mobility the pace of
consumption will continue.
Let us look at the numbers
As per the latest data from CSO, private final consumption
expenditure (PFCE) accounts for 57 per cent of GDP and hence is the leading
sector. Growth in PFCE at current prices has slowed down from an average
annual growth rate of 15.7 per cent during 2009-10 to 2013-14 to 11.9 per
cent in the 2014-15 to 2018-19 period. This is quite a sharp drop and the
near stagnation in this growth rate calls for introspection.
The lower consumption picture today is reflected in the low auto
sales growth which persisted even in April. Some of the FMCG companies that
have announced their results have indicated sluggishness in growth in sales
At the level of IIP growth consumer goods growth has not been
Durables have increased by 5.3 per cent (0.8 per cent) and
non-durables by 3.8 per cent (10.0 per cent) in FY19. Quite clearly there
are few signs of buoyancy in growth here.
In fact, within the durables segment, a major thrust has come from
computers which is more office oriented than household personal expenditure.
The TVs and AC segments have witnessed negative growth.
The jobs factor
As the last five-year period had witnessed this declining trend
the answer would be found in the now much debated issue of low-job-high GDP
The pace of employment in the last few years has slowed down which
has reduced the purchasing power of households.
This also fits in with the more recent controversy of the GDP
numbers using data on 5 lakh companies of which 36 per cent are missing.
Therefore GDP growth has been reckoned at a higher level but has not been
commensurate with employment creation.
While it is true that jobs have been created in certain sectors
like retail, e-commerce, and construction, the overall spending power tends
to get restricted more to the subsistence level where purchasing power is
limited to non-discretionary items with the only exception being mobile
handsets which have a strong import component.
In the private organised sector corporate performance has been
buffeted by various reforms in the form of demonetisation and GST.
This has led to lower increases in income which had impacted
consumption growth as discretionary expenses tend to get impacted more.
Also with the SME segment being affected by both these reforms,
there has been a tendency for both employment and income levels to get
There has, however, been some compensation on the government side
where the two measures of OROP for the defence forces and pay revisions for
both central and state government officials have increased purchasing power.
This has definitely helped to maintain consumption growth in the
double digit level but has not been sustained as saturation sets in after a
point of time. but quite clearly the big push that is required is not there.
The rural drag
The rural story has not played out for successive years. While the
government announced laudable increases in MSPs in 2018-19, the farmers did
not receive the same as there are issues when it comes to government
procurement which is primarily in rice and wheat by the FCI.
Therefore, a good harvest for farmers did not lead to higher
prices but lower outcomes which affected spending power. This was
responsible for lower demand during the traditional post-harvest festival
season which in turn led to the build-up of inventory by auto manufacturers
The level of inequality has increased in the country which has led
to saturation in consumption standards.
This is the classic Piketty situation where growth in the last few
years has tended to get concentrated at the higher levels where incomes
especially from capital has increased sharply thus exacerbating the
difference between the lower and higher income levels.
It may be recollected that the MGNREGA scheme had helped to an
extent in boosting consumption of non-staples as this was additional income
received that was used for higher value consumption food articles as well as
Such a direct push can be the immediate stimulus.
In the normal course it would take a few years for the consumption
cycle to pick up and real economic growth is a pre-requisite where adequate
jobs are created so that purchasing power is generated.
Therefore, the consumption led growth story will be gradual and
circular with higher growth leading to more employment and income which
spurs consumption which in turn fosters growth.
This would be the circle of growth in the next five years.
Q.1) Consider the following statements regarding Anthropological Survey of
India: 1. It is the only research organisation to pursue anthropological research
in a Governmental setup.
2. It is involved with studying of tribes and preserving of human skeletal
remains from ancient period.
3. It functions under the Ministry of Science and Technology.
Which of the statements given above is/are correct? (a) 1 and 2 only
(b) 2 only
(c) 3 only
(d) 1, 2 and 3
Q.1) The deceleration in consumption growth over the last five years is a
result of lack of jobs, rural distress and growing inequality. Critically