How the Indian Economy Can Recover

The issues of distribution and devolution have been central points of contention in economic and political realms in India. The importance of these issues is beginning to be slowly realised in the context of the COVID-19 pandemic. At the present moment, the Indian economy is facing a quadrangular crisis. Firstly, the slumping of growth rates, dipping to the lowest in the past decade, which began before the onset of the pandemic. Secondly, economic shock due to the lockdown, which further intensified the depressing of growth rates. Thirdly, due to loss of their livelihoods and employment, millions of people are being pushed below the poverty line, which will exert a significant drag on the domestic demands. Fourthly, and most importantly, an issue that can’t be quite captured and explained by the numbers, is the humanitarian and social distress that has a devastating impact on the rural population and urban poor.

To recover from the crisis, the centre and the state governments in India had announced huge packages and changed the labour laws, which mostly aim at giving stimulus to the supply side of the economy by incentivising corporates to make more investments and increase the production capacities. However, these measures do no more than lip service to the demand side and will not help the economy as a whole under the current scenario. There are two dimensions to understand why the supply-side measures may not be helpful for the revival of the economy.

Firstly, corporates seem to hesitant about making investments due to less demand. To understand this, one has to look at the consumption and demand patterns in the economy. CMIE (Centre for Monitoring Indian Economy) data on the consumption in India points out that Indians spend 60% of their total consumption expenditure on food and energy; when this ratio is taken separately for each decile from high income to low income, people in lower income deciles tend to spend more on food and energy when compared to people in high deciles, with bottom half spending 70% on essentials alone. As the pandemic had caused a reduction in income levels and rising unemployment, there is an increasing push in the proportions of income that is being spent on the essentials. So, the demand for goods and services other than food and energy is declining sharply, leading to a greater fall in the effective demand of the economy and this phenomenon will influence the investment decisions of the corporates.

This situation could be illustrated by the shoe factory example given by Paul Rosenstein-Rodan to explain the stagnation of investments in post-war Italy in the 1940s. Suppose that you are the owner of a shoe factory and you have to decide whether to invest more in production or not. Let’s say, you recruited more workers to produce shoes, thus increasing the income of the workers and the production of shoes. But who would buy your shoes if you are the only investor in the economy expanding the production capacity? What if each of the business owners in the economy thinks in the same way? This would result in investors showing no interest in expanding the production, which will result in more unemployment and a further dip in the demand, and the cycle repeats.

Secondly, if we assume that investments will increase due to the supply-side measures that are taken by the governments, they will be least helpful in increasing the overall effective demand in the economy due to the ineffectiveness of corporates in creating a trickle-down effect to increase the overall incomes. As there is a less demand for their goods coming from people in lower and middle deciles, corporates will have to sell their goods and services in a limited market, either through exports or for the people in top-income deciles. This is an unsustainable model because it is exclusive and will not benefit all. It may provide stability to the economy in the short-run, but in the long-run it will not help the economy.

Any attempt to boost the economy with the supply side measures alone is bound to jeopardise the objectives to stabilize the economy. What is required at this moment is a sustainable model which will be both inclusive and can keep the economy on the growth trajectory for a long time. The only way this objective can be achieved is through the government’s focused intervention to increase the domestic effective demand, coupled with the distribution of resources and devolution of power. The governments should focus on increasing employment, especially in rural India, which was badly hit by the economic shocks of the pandemic. Directly and indirectly, a huge percentage of the Indian population depends on agriculture and its allied activities. This sector is an abode of underemployment and for the unemployed people who continuously struggle to make their ends meet. Increasing the utility of this section of population can make growth sustainable. If the governments can create employment opportunities by increasing the price of the agricultural output and improving the agricultural supply chains, incomes of the people will increase, leading to greater consumption expenditure, increasing demand, and in the long run it will benefit a large section of the Indian population. Demand-side measures can’t be made in a vacuum. They should be complemented by consistent distribution and structural devolution measures. Distribution, especially the essential goods, will increase the proportion of disposable income in the hands of the people, which will increase the effective demand in the economy as a whole.

But the route to distribution is not smooth. One of the toughest problems on the ground in coping with the pandemic is the inefficiency of the public goods distribution networks. Reports are pouring out in almost all regional and national newspapers suggesting the leakages in the distribution schemes like PDS. Because of the lack of ration cards, food supply kits become inaccessible for people in the remote areas. Some people are either unaware of the benefits allocated for them or do not know how to access them. Leakages, inaccessibility, and unawareness combine to make the distribution fail.

The most effective way for increasing the efficiency of the public distribution is to empower the panchayat systems at the village levels. It is a matter of great regret that, even after three decades of the passing of 73rd and 74th amendments to create ‘institutions of self-government’, India could not exploit the potential of these systems. With the current, there is an opportunity to realise the need for structural devolution of powers, and to tackle the inefficacies in the working of government policies. Village level administrative units should be empowered to prevent the leakages and strive for the effective reach of government welfare benefits to the people.

In conclusion, an effective strategy to make India’s growth sustainable requires three D’s – demand side measures, efficient distribution channels, and devolution of power – acting parallelly and complementarily to each other.

-Revanth Reddy (Freelancer)

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