In order to increase consumption, the government has to work on the fiscal side and reconsider tax rates. (Representational Photo)
The Indian economy has done well in growing by above 7 per cent for three successive years while other major countries have struggled to stay afloat. However, if one looks closer, the picture is not that straightforward. In the five-year period ending in 2018-19 (pre-Covid), the economy added Rs 41.9 lakh crore in terms of real GDP. However, in the next five years ending 2023-24, it added just Rs 33 lakh crore as the pandemic disrupted economic activities. This should be the starting point for the next government.
Demand holds the key
There are five areas that need to be focused on. The first is reviving private investment. The government has been very active on the capex front which has kept the clock ticking on the infrastructure front. Heavy investments in roads and railways through backward linkages have driven growth in sectors such as steel, cement, machinery and chemicals. But this is only one side of the story. The private sector now needs to do its part. Private companies run on profit motive and return on capital is the primary metric for any investment decision. But, for return to be meaningful, demand is necessary. The PLI scheme has had limited success so far. It has been visible in the mobile phone, solar panels sectors, and partly in electric vehicles so far. Widening the PLI to include schemes for SMEs can be something that should be taken up. Providing incentives like investment allowance would also be worth experimenting with.
The second focus area should be on increasing household consumption. Household consumption has been volatile in the last few years — the pent up demand during the pandemic led to a surge for services and partly for manufactured goods. That’s why we saw the hospitality and tourism sectors doing well. However, demand for consumer goods has not quite taken off. In fact, surplus capacity is one reason that investments in this sector have been muted. Add to this high inflation, and demand has been further compressed. Rural demand too has been weak as farm output was affected last year due to a sub-normal monsoon.
Rethink taxes
In order to increase consumption, the government has to work on the fiscal side and reconsider tax rates. The disposable income of individuals can go up by lowering direct tax rates and rationalising the GST slabs. It has also been observed that household savings have been declining. While taking a harder look at the existing tax structures, the government can also reconsider the old tax scheme and provide further avenues for savings.
The third action point is not directly under the control of the government as it relates to employment generation. This revolves around the private sector, though, on the government’s part, it can full up all the vacant positions, providing a small push to job creation. But, only with consumption taking off, will investments rise, creating the required employment opportunities.
Focus on farms
Four, a decisive stance needs to be taken on agriculture. The farm laws, which faced a lot of opposition, must be brought back on the discussion table and should be debated and discussed with various lobbies so that an acceptable solution can be reached. Government participation in farming through state cooperatives must be actively considered as any crop failure that precipitates an increase in prices because a cause for government intervention. Further, the government’s stance on agricultural trade needs to be clearly enunciated, which will provide more certainty to the farmers. Having a standardised operating procedure for procurement and distribution is absolutely necessary so that there is less scope for knee-jerk reactions. Lastly, the ban on futures trading in products like oilseeds, pulses and cereals should be revoked and greater space must be made for the market to operate as this has the potential to improve overall productivity through a robust price discovery process.
Fifth, making India an integral part of global supply chains. This would mean entering into more free trade agreements with large trading partners. In the last five years or so, there has been significant acceleration in services exports with the IT sector taking the lead. But the same has not been the case in merchandise exports. This needs to change.
It is also expected that the government will work aggressively on lowering the fiscal deficit over the next few years. While the target of 4.5 per cent of GDP will most probably be achieved by 2025-26, the important thing is to move towards the 3 per cent mark. This will require deft balancing by the next government.
The writer is Chief Economist, Bank of Baroda
