Hyderabad: The national economy is facing several challenges. In the first quarter of 2019-20, GDP has fallen to the lowest in 6 years. Unemployment rate is at 45-year old high. Gross fixed capital formation, which is net investment in fixed assets as a share of the GDP, fell to 32.3 per cent during 2017-18.
Accumulation of non-performing assets in banks, distribution companies’ losses in power industry and lack of competitiveness in the economy are all pointing towards systemic failures in our economic structure.
Another major challenge that the nation is facing is the fall in consumer spending. Growth in private consumption expenditure slumped to an 18-quarter low of 3.1 per cent. In terms of GDP, the rates of private final consumption expenditure at current and constant prices during 2019-20 are estimated at 57.7 per cent. Sudden dip in consumption expenditure is ringing alarm. This is impacting industries and citizens alike. The central government started taking measures to bring the economy back on track.
If the inflation rate is less than what the RBI estimates, it shows a weakened consumption demand. If it is more than the estimate with slump in growth rate, that is an indicator of supply issues in the system.
Consumer-price growth has steadily declined over time to 3 per cent now. It is clear that this situation is due to a drop in purchasing power. Since the personal consumption of people is less, industries became powerless in deciding prices. As a result, inflation in non FMCG sector also took a plunge. Generally, interest rates come down if inflation decreases. But the current situation is different. In a year’s time, RBI has reduced repo rates by 110 points to 5.4 per cent but the banks have not reduced their interest rates accordingly.
Even now, banks are issuing personal loans at 14 per cent interest rate. As a result, there are no takers for loans. Since inflation is low, there is no significant increase in people’s salaries which means they do not have excess money for purchasing. With people deciding to postpone purchases so that they can have liquid cash, consumption demand has fallen.
Government expenditure which accounted to 15.4 per cent in 2010-11, fell to 12.2 per cent in 2018-19. This was the result of central government tax revenue falling to 6.9 per cent from the previous 7.3 per cent.
Inherent issues in rural economies are one of the reasons for the fall in consumption demand. According to National Sample Survey Office (NSSO), 52 per cent rural families nationwide are neck-deep in debts.
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The World Bank statistics reveal that 25 per cent rural population are suffering in poverty. NABARD surveys show that average income of rural households increased only by Rs. 2,505 in the past 4 years.
There is a wide disparity between rural and urban economies. According to NITI Aayog reports, an average laborer in the city earns 8 times more than his rural counterpart. There is a clear disparity in the urban-rural debts also. This disparity is impacting their consumption power, quality of life and access to basic amenities. 45 per cent of the nation’s population is dependent on agriculture. It is obvious that there is excess dependence on agriculture due to lack of other livelihood options in villages. Transport systems and supply chains are incompetent in rural areas. As a result, rural population is unable to reap the benefits of changes in international markets.
In order to put an end to these miseries, effective reforms are needed. Governments must create alternative livelihood options in rural areas. They must focus on technological advances in agriculture which help increase crop yield and quality. Besides encouraging a large number of micro-entrepreneurs, small farming communities must be established. Roads, electricity and water supply facilities must be expanded. Instead of using Rural Employment Guarantee Act as a means of temporary employment, it must be modified to impart useful skills among rural population. People must be trained according to their capabilities and choice of interest. They must be provided stipend during the training period.
Lion’s share of Rs.100 lakh crores intended to develop crucial infrastructure must be allocated to rural economy. Two-thirds of the nation’s population lives in villages. The government aims to increase the minimum Support Price (MSP) so that farmers’ income will double by 2022-23. But it is proven time and again that farmers would not benefit from high MSP due to loopholes in the system. Instead, non- agricultural income sources must be developed in order to increase the income of farming community.
By implementing these procedures, rural economy can be made self-sustainable thus boosting the national economy.
The central government has initiated several fiscal stimulus packages to get the economy running. It proposed the investment of Rs.100 lakh crores in crucial infrastructure industry in the next 5 years. Basic Corporate Tax has been reduced to 22 per cent (excluding cess and surcharges). New corporates established between October 2019 and March 2023 will have to pay only 15 per cent corporate tax. As a part of encouraging hospitality industry, taxes on hotel rooms have also been slashed. As a consequence of these tax remissions, the government is estimated to suffer a loss of Rs.1.4 lakh crores per year.
The Center took several actions to improve the state of basic amenities and infrastructure in the country. Restructuring the national highways, improving the railways through public-private partnership and aircraft financing are some of the action plans. Improving conventional industries and increasing employment in such enterprises is one of the motives. The laws are being reformed to increase the ease of doing business in India. These actions prove that the government’s main agenda is to accelerate economic growth. All these actions take some time to yield results.
Rural India has the potential to speed up consumer demand and national economy. 50-60 per cent of Petrol and Diesel prices account for taxes to central and state governments. The fuel prices can be reduced by decreasing the taxes. Income tax relief can be given for citizens with more than Rs. 5 lakh annual income. All these measures will act as immediate boost to the economy. Consequently, the economy will recover from financial setbacks.
