Day 50 – Q 5.What vulnerabilities does decline in economic growth bring along? What are the most vulnerable groups of population towards economic shocks? Are there mechanisms to address this vulnerability? Examine.
5. What vulnerabilities does decline in economic growth bring along? What are the most vulnerable groups of population towards economic shocks? Are there mechanisms to address this vulnerability? Examine.
आर्थिक विकास में किन कमजोरियों के साथ गिरावट आती है? आर्थिक झटके के लिए जनसंख्या के सबसे कमजोर समूह कौन से हैं? क्या इस भेद्यता को संबोधित करने के लिए तंत्र हैं? जांच करें।
Economic slowdown can be cyclical or structural in nature.
- A cyclical slowdown is a period of lean economic activity that occurs at regular intervals.
- A structural slowdown, is a more deep-rooted phenomenon that occurs due to a one-off shift from an existing paradigm.
Vulnerabilities due to decline in economic growth:
- The slowing growth of GDP is the major indicator of slowdown.
“GDP can be thought of as a measure not so much of size…It measures the movement of money through and around the economy; it measure the activity.”- John Lanchester.
- Drop in automobile sales- the production in top 5 firms in India has dropped by about 30% compared to 2018.
- Drop in Fast moving Consumer Goods sector: Compared to 2018, the sectors growth fell by about 9.7% in the rural areas. This is the sector which has demand even during the poor economic performance as this constitutes basic necessities like toiletries, OTC medicines etc.
- Consumption: Private consumption, which contributes nearly 55-60% to India’s GDP, has been slowing down.
While the reduced income growth of households has reduced urban consumption, drought/near-drought conditions in three of the past five years coupled with the collapse of food prices have taken a heavy toll on rural consumption.
- Savings: Savings by household sector – which are used to extend loans for investment — have gone down from 35% (FY12) to 17.2% (FY18).
Households, including MSMEs, make 23.6% of the total savings in the GDP.
- Investment: Gross Fixed Capital Formation (GFCF), a metric to gauge investment in the economy, too has declined from 34.3 per cent in 2011 to 28.8 per cent in 2018, government data show. Similarly, in the private sector, it has declined from 26.9% in 2011 to 21.4% in 2018.
- NBFC crisis triggered by IL&FS default led to a liquidity crunch in the economy.
- RBI’s Annual report highlighted that there are still structural issues in land, labour, agricultural marketing and the like that need to be addressed.
Most vulnerable groups of population
- Farmers: Price of agricultural products is stagnant, resulting in farm distress and fall in income and consequent fall in purchasing power—which is directly related to lack of demand.
- Consumers: Increased cost of Living The rising costs of fuel, food and basic daily items further cause consumer difficulties. When consumers spend increased portions of their monthly budget on necessities such as food, fuel and gas, it leaves less money for them to pour into the economy to help offset an economic slowdown
- Entrepreneur: While start-ups dealing with sectors impacted directly by slowdown will have a large effect on their business growth, start-ups engaged in consumer
retail and essential business will have a blip in their growth until a deeper sense of the impact is realized.
- Exporters: Net exports, this figure for April to June 2019 stood at -$46 billion. This was almost similar to the net exports for April to June 2018 at -$46.6 billion. This is primarily because both exports and imports during the period were at almost similar levels as last year. Given this, there hasn’t been any increased economic activity on the exports front either.
- Investors: The value of new projects announced during April to June 2019 fell by 79.5% year on year. This is the highest fall since September 2004. In absolute terms, the value of new investment projects announced during April to June 2019 stood at ₹71,337 crore, the lowest since September 2004. This is a great indicator of the fact that businesses really do not have faith in the economic future of India.
- RBI, in its annual report, called for counter-cyclical actions in terms of monetary and fiscal policies, along with deep-seated reforms for the structural slowdown
- Economic Survey 2018-19 asked for taking measures to boost investment, especially private investment, that is the ‘key driver’ that drives demand, creates capacity, increases labour productivity, introduces new technology, allows creative destruction, and generates jobs.
- The Economic Survey of 2018-19 had suggested making the MGNREGS more efficient in targeting areas of low consumption expenditure where demand for such work is higher.
- The ILO’s 2018 report had suggested policies to enhance wages and collective bargaining power so that wages grow in tandem with labour productivity, more so since India relies on progressive increase of domestic consumption by lower and middle income groups as a key factor in overall aggregate demand.
* Enhanced surcharge on FPIs and surcharge on domestic investors in equity markets withdrawn.
* Aadhaar-based KYC for opening demat accounts and investment in mutual funds.
* Govt to consult with RBI to enhance Credit default swap options.
* CSR violation would be treated as a civil offence, not a criminal offence.
* All pending GST refunds till now shall be paid in 30 days. Future GST refunds to be paid in 60 days.
* GST system to be simplified further.
- Auto sector:
* BS-IV cars purchased till March 2020 to remain operational for the entire period of registration.
* Govt asks its departments to replace old vehicles.
* Higher vehicle registration fee deferred to June next year.
* Depreciation increased to 30 per cent for all vehicles purchased till March 2020.
* Scrappage policy to be announced soon.
* Govt withdraws angle tax provision for startups and their investors.
* One-time settlement policy for MSME loans. Policy to be based on checkbox approach.
* Laws to be amended to ensure one MSME definition.
- For NBFCs:
* NBFC can now use Aadhaar-based KYC.
* Additional liquidity to support Housing Finance Companies by National Housing Board increased to Rs 30,000 crore
* Govt to release Rs 70,000 crore upfront for PSBs recapitalisation.
- Home, auto loans:
* Banks to make home, auto loans cheaper. Banks have agreed to pass on the rate cut announced by RBI to customers. Banks to launch Repo Rate linked loans.
* Online tracking system for home, auto loans.
* PSBs to return loan documents to customers within 15 days of loan closure.
- Income Tax:
* From October 1, all Income Tax notices must be disposed off within 3 months.
A strong revival in investments and exports could help India navigate her way out of both domestic and external weaknesses. As global value chains get reshaped under the shadow of the US-China trade war and the impending launch of a long-awaited pan-Asian trade deal (RCEP), India’s more competitive tax rates could help the economy grab a larger share of the global trade pie