Open Forum

New Delhi, 12 March 2025   

Revival of Economy

STRUCTURAL REFORMS VITAL 

By Dhurjati Mukherjee 

With the economy growing 6.2% in the December quarter, recovering just a little from a seven-quarter low, economists are divided on the issue of revival of the economy. It is difficult to believe there has been any noticeable improvement in the first two months of the calendar year. Surveys had predicted weakened spending of households, whose incomes have long lagged the price rise, induced taxation-led support for consumption. Though food inflation has been brought down, the purchasing power of the people has not improved and is unlikely to be positive in the next two months or so. 

A few days back the International Monetary Fund, as usual, underlined the need for structural reforms, arguing that PLIs (production linked incentives) would not be sufficient to create jobs needs to absorb the growing labour force. These reforms encompass the judiciary, tariffs, labour regulation along with a stable regulatory regime. An important point, in the latest review, has called for GST simplification along with a cut in excise duty on fuel and broadening of the income tax base. 

“Looking ahead India’s financial sector health, strengthened corporate balance sheets and strong foundation in digital public infrastructure underscore India’s potential for sustained medium-term growth and continued social welfare gains. Risks to the economic outlook are tilted to the downside”, IMF observed. 

Meanwhile, the somewhat reduced public capital expenditure leads to a dependence on private investments as well as consumption. But private investments are not forthcoming to the desired extent as such investment is significantly influenced by consumer demand. Thus, in sectors like education, hospitals and hotels there is a lot of activity in the private sector, not in manufacturing. The fast-growing consumer goods companies, whose stocks have taken a severe battering, remain pessimistic about their immediate future growth and profits. 

The very fact that there is a resource crunch, even of the Central government, is reflected in the fact that it’s expected to recommend the share of taxes going to states be reduced to 40% from previous 41%. The proposal has been cleared by the Cabinet recently. A 1% swing in the states’ share of tax revenues could give the federal government about Rs 35,000 billion, based on the expected tax collection for the current fiscal. But as states have a share of over 60% in total government spending in the economy and are concentrated more on social infrastructure such as health and education, these sectors which need huge funds will be affected. 

Though the federal government’s spending is more focused on physical infrastructure, the states also incur huge expenditure on roads and bridges.Notably since the pandemic, the Central government increased the share of cesses and surcharges, which are not shared with the states, to over 15% of the gross tax revenue from 9-12% earlier. Obviously, a shift in resources available to the states could lead to changes in spending priorities. 

According to the RBI’s consumer survey, the consumer mood was subdued in January this year from last November with deepening gloom since the start of the current fiscal. Additionally, the subdued sentiment was also evident in February and this is expected to remain so in March as well. This is because even a large section of the middle class does not have sufficient resources to spend except, of course, on essentials and education and health, the costs of which have increased considerably.  

Private investment, interest costs outweigh a demand deficiency for products and services, be the source domestic or for exports, the longstanding investment deficit over many up-and-down cycles point to the role of other factors. The spectre of inflation has re-emerged with significant depreciation of the rupee and its persisting downfall trend. It has made further monetary easing uncertain besides increasing exchange-rate risks. 

Added to this are external developments which have been staggeringly unpredictable, disruptive, inconsistent and risky in the past two months. This includes the barrage of threats of trading partners, particularly tariffs, walkouts from global bodies and forums, unilateral conflict resolving issues, alienation of long-standing allies etc. 

The weak rupee has been a big problem, specially for Indians studying abroad. Adding to their pain is the tightening of post-education work visa norms, which dims chances of higher pay abroad and repay loans sooner back home. In six months, the rupee depreciated by about 5% to 87.2 against the dollar from 83.5 in August. That’s an increase of Rs 5 lakh on a Rs 1 crore tuition-plus-expenses budget. Meanwhile, the U.S., the U.K. and Canada have been tightening immigration rules for Indian students, attributed to ‘economic patriotism’, which has been on the rise.  

Coming to other parameters of the economy, the unemployment situation is indeed critical while wage growth has not kept pace with the general price increase. In fact, in small business, there has been insignificant or virtually no wage increase, and employees have no option but to continue. There is need to find out the wage increase in the unorganised sector and other such sectors to find out how the common man has to struggle for mere existence. 

Regarding affordable housing, it has shrunk considerably as most people are forced to live on the periphery of cities or in satellite towns and travel long distances daily to reach their place of work. It is almost impossible for the low-income groups and even the lower section of the middle-class family to afford a house in the city as most builders are busy catering to the upper echelons of society with flats costing over Rs 80 lakhs or even more. 

Finally, it needs to be stated India has not been successful in distributing its purchase power and failed to strengthen the small and medium sector. Analysts have found that a major part of this sector has failed to move ahead through modernisation and technology upgradation due to discrimination in bank credit. The total outstanding credit to the SME sector in this country adds up to just 8% of the GDP compared to 120% in China while in Japan and Korea it is roughly equal to the size of the GDP. 

Thus, as rightly pointed out by Harvard economist Michael Walton Indian banks provide credit to the country’s oligarchic capitalists, thereby clogging the banking system with a mountain of debts and leaving very little to the cash-starved small business to expand and grow. The State is obsessed with increasing the income of the top 100-200 business groups or so and providing them all facilities. This will not help in economic revival unless the benefits of growth and development reach all sections, all regions and all segments of the population.---INFA

  (Copyright, India News & Feature Alliance)