With India’s growth rate having fallen steeply over the last five quarters — from 8.1 per cent in Q4 of 2017-18 to 5 per cent in Q1 of 2019-20 — it is just as well that the Centre has woken up to the gravity of the situation. As it unveils its promised stimulus packages over the next few days, it should address the key factors pegging back growth: the fall in growth of private consumption and investment. While the turbulence in the world economy and its knock-on effects through trade and financial channels cannot be denied (as explained by the RBI in its Annual Report 2018-19), there is much that can be done to revive the domestic economy. That there is a demand crisis that is holding up investment is borne out by a stark fact, highlighted in State Bank of India’s Ecowrap report — “the real rural wage growth (adjusted by CPI-Rural labourers) has plunged from 14.6 per cent in FY14 to merely 1.1 per cent in FY19. The subsequent decline in wage growth and structural changes resulted in stagnating per capita income growth (in real terms) and hence to keep the consumption expenditure at the same level, the household savings also declined.” It adds, in the same vein: “the weighted contribution of clothing (a non-discretionary item) in rural CPI has plunged from 39 bps in June 2018 to almost zero in June 2019 and July 2019, indicating demand slowdown.” This evaporation of rural demand, along with signs of jobs attrition in urban regions, perhaps explains the 0.6 growth of the manufacturing sector in the April-June quarter, against 3.1 per cent in the March quarter. The 3.1 per cent growth in private consumption expenditure in Q1 tells a story of demand crisis. This resulted in a deviation of actual output from its potential level (fall in capacity utilisation) in Q3 and Q4 of 2018-19, according to the RBI. Meanwhile, capital formation grew just 4 per cent in Q1 of this fiscal.
With the impact of the monsoon still uncertain in terms of rural incomes, the Centre needs to take urgent steps to revive the rural economy, besides trying to pry open the credit spigots. While monetary accommodation is likely to continue in various forms, it is a fiscal boost, intelligently implemented, that will have an immediate impact. The Centre must implement irrigation, road building and affordable housing schemes with a renewed sense of urgency. Social infrastructure in the form of creating schools and hospitals should be made to wait much longer.
As a longer-term measure, declining household savings, a result of poor job creation, must be arrested. This trend translates into fewer investments and a fall in potential growth as well — hardly the way to get to a GDP of $5 trillion in the next few years.