India’s Economic Slowdown and Recovery Strategies

The Indian economy is currently facing challenges. Recent provisional estimates of the Gross Domestic Product (GDP) reveal a growth rate lower than anticipated. This slowdown persists despite increased capital expenditure in government budgets. A historical perspective on the Indian economy can provide vital information about the current situation, particularly focusing on private consumption, important driver of the domestic market.

Historical Context of Indian Economic Growth

• The post-reform period can be divided into three distinct phases – 1991-2004, 2004-2011, and 2011-2023.
• The period from 2004 to 2011 is notable for sustained high growth rates and a reduction in absoluterecent-findings/" target="_blank" rel="noopener"> poverty.
• During this time, state interventions through rights-based legislation and national schemes gained momentum.
• In contrast, the period from 2011 onwards has been marked by a decline in growth rates, particularly post-2019, with sluggish private consumption and investment.

Factors Behind Economic Slowdown

• Several factors have contributed to the current economic slowdown.
• Shocks such as demonetisation, the introduction of the Goods and Services Tax (GST), and lockdowns during the COVID-19 pandemic have impacted the economy.
• The growth patterns during the high growth phase reveal an inverted U-shaped curve for both GDP and private consumption, indicating a complex relationship between growth and consumption dynamics.

Role of State Policy in Consumption Patterns

• During the high growth period, the consumption share of the wealthiest 20% declined while that of the bottom 80% increased.
• This shift was largely due to state policy prioritising spending that benefited lower-income groups.
• Government expenditure that favours the working class generates a larger multiplier effect, stimulating overall demand. For instance, spending on employment guarantees leads to greater consumption than capital-intensive projects.

Current Government Response and Recommendations

• The government has recognised the slowdown but has primarily focused on capital expenditure.
• This approach is based on the assumption that increased capital spending will stimulate private investment.
• However, private investment has not responded to this strategy due to a lack of demand.
• An alternative approach emphasises increasing revenue expenditure, particularly in the social sector, to create a virtuous cycle of income and employment, eventually encouraging private investment.

The Need for a Balanced Fiscal Strategy

To effectively address the economic slowdown, a dual strategy is required. First, the overall fiscal expenditure as a share of GDP must increase. Second, within that, the share of revenue expenditure should rise . This shift would prioritise improving the living conditions of the working population, aiming to reverse the current economic downturn.

Questions for UPSC:

1. Critically analyse the impact of economic policies on income inequality in India post-1991.
2. Estimate the role of government expenditure in stimulating private investment in the Indian economy.
3. What are the implications of the Goods and Services Tax (GST) on small businesses? Discuss.
4. With suitable examples, explain the relationship between public spending and economic growth in developing countries.

Answer Hints:

1. Critically analyse the impact of economic policies on income inequality in India post-1991.

1. Post-1991 economic reforms led to liberalization, resulting in increased wealth concentration among the top earners.
2. While GDP growth accelerated, income inequality widened, with the richest 20% capturing a larger share of national income.
3. State interventions, particularly from 2004-2011, temporarily reduced inequality by increasing consumption among the bottom 80%.
4. Recent policies have failed to sustain this trend, leading to a resurgence in income disparity.
5. Overall, economic policies have had mixed effects, benefiting some while neglecting others, exacerbating inequality.

2. Estimate the role of government expenditure in stimulating private investment in the Indian economy.

1. Government expenditure, especially in infrastructure, is expected to crowd-in private investment by improving economic conditions.
2. However, the current focus on capital expenditure has not led to increased private investment due to low demand.
3. Investment responds more to market activity levels than to cost reductions, limiting the impact of tax cuts.
4. Increased revenue expenditure, particularly in social sectors, can enhance disposable income and stimulate demand.
5. Historical patterns indicate that targeted spending can have a larger multiplier effect on private investment than broad capital projects.

3. What are the implications of the Goods and Services Tax (GST) on small businesses? Discuss.

1. GST aimed to simplify the tax structure but has led to increased compliance burdens for small businesses.
2. Many small businesses struggle with the complexities of GST filing, impacting operational efficiency.
3. While GST could enhance competitiveness by unifying markets, it may disadvantage smaller firms lacking resources.
4. Some small businesses have reported increased costs due to higher tax rates on certain goods under GST.
5. However, GST has also provided opportunities for small businesses to access larger markets and improve transparency.

4. With suitable examples, explain the relationship between public spending and economic growth in developing countries.

1. Public spending on infrastructure (e.g., roads, schools) can drive economic growth by enhancing productivity and accessibility.
2. Investment in social services (e.g., healthcare, education) increases human capital, leading to long-term economic benefits.
3. Example – In India, the National Rural Employment Guarantee Act (NREGA) boosted rural incomes and consumption, stimulating growth.
4. Conversely, inefficient public spending can lead to waste and corruption, undermining growth potential.
5. Overall, effective public spending can catalyze growth, while misallocation can hinder development efforts.