Illustration by Arindam Mukherjee | ThePrint
Illustration by Arindam Mukherjee | ThePrint
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In the midst of a demand slump, the like of which the economy has not seen for some time, there will be many experts offering reasons and solutions. This is a modest contribution to the debate. Indian consumers are up to their necks in debt. EMIs (equated monthly instalments on loans) have been taking an ever-larger share of take-home pay because a steadily larger share of consumption has been fuelled by borrowed money. Making matters worse, many people are paying EMIs on loans taken for lakhs of houses or flats lying incomplete for years.

A picture of TN Ninan, chairman of Business Standard Private LimitedSecond, consider the effects of lower inflation. Pay hikes get smaller, so the easing of the EMI burden that used to happen over time is now absent. Also, because interest rates too have come down, people are pushed to save more for their senior years, and spend less now. Third is the negative wealth effect. Real-estate prices have dropped by 25 per cent and more. Stock market indices too are lower than they were a year ago, and many mutual funds have given poor if not negative returns. When people feel poorer, they spend less.

Fourth, the employment structure has changed because there are fewer women in the workforce. Whatever the mix of reasons (women studying for longer, gentrification, lack of safety during the commute, and a shortage of work available), there are now fewer working adults in the typical family. This must affect family incomes. Fifth is the possible impact of people living longer. The population in the 60-plus age group is growing at about twice the overall population growth rate (more than 35 per cent in a decade). This must raise health costs for families as they take care of the elderly. Consider the sharp increase (154 per cent over four years to 2017-18) in household debt for reasons other than housing, vehicles, consumer durables, and education. Some of this might be for marriages and other social occasions, but some would certainly be to cover medical bills.

Sixth is the point that Rathin Roy, member of the Prime Minister’s Economic Advisory Council, made — that much of the demand for goods and services is confined to a thin upper crust. Not as thin as he says, because the consuming cohort is 30-35 per cent of the total population. As an indicator, the 2011 Census showed that 21 per cent of the 246 million households owned a powered two-wheeler. That percentage would be appreciably higher today, as about 6 per cent of households — 17 million in 2017-18 — have been buying two-wheelers every year. Only some of that would be replacement demand. Still, Roy is right that the spending cohort is not growing fast enough.

One reason would be that the growth of labour-intensive manufacturing (which has the capacity to deliver a living wage rather than just a minimum wage) has not been able to create a larger spending category at the lower-middle class level. The gig economy, typically with lower productivity and therefore incomes, is no substitute.

Also read: RBI fix for slowing consumption demand — incentives to banks for retail lending


Finally, there is the transition in agriculture. Farmers now produce more than domestic markets can absorb. In the absence of exports as a sufficiently large spillover outlet, the changing domestic demand-supply balance has created price pressures that limit farm incomes despite higher production (which comes with higher costs and more variable prices, and therefore greater uncertainty). Again, if labour-intensive manufacturing had succeeded, and pulled people into factories from farms, there would have been fewer farm mouths to feed.

It boils down to the changes needed to facilitate wage-intensive manufacturing (including labour law reform, a competitively-priced rupee, efficient infrastructure, supply-chain development, etc). The government has an agenda on some of this, but — to take one example — it is not enough to reduce multiple labour laws into four codes. Mere compilation/number reduction without a change in the content of the codes will make no difference. Under pressure to revive the economy, the government might look for quick fixes. That’s understandable, but no one should labour under any illusions. Without structural change, sustainable economic growth will continue to trend downward.

Also read: India’s trade deficit narrows as demand wanes in sluggish economy


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4 Comments Share Your Views


  1. Without a well-trained work force, all will be reduced to a farce. The education system has to be reformed, starting from the schools. Students have to be prepared for the industrial life from the beginning.

  2. See the havoc which floods are causing in southern Maharashtra and northern Karnataka. A $ 5 trillion economy will need every drop of this water which is powering its way uselessly to the ocean. Climate change will give us more such events. A pragmatic government would be working diligently to address these long standing and growing challenges to our well being. Not tilting at the windmills of some legacies that a complex history has left us.

    • To be fair to Modi: he has set ambitious targets for solar power. And that is connected with climate change.

      But a country is basically run by engineers. And India isn’t producing enough good ones (along with good workers)

  3. If households are struggling with ballooning debt and tepid income growth, so is the government. So the traditional “ fix “ of increased public outlays is not an option. Instead, the government needs to review its own spending. Three trillion wasted on the PSBs over the last six years. Not one worthwhile PSU privatisation / sale, starting with Air India. The column’s wish list was equally a call to arms for Niti Aayog’s in 2014. 2. Too much money being spent on security, both external and internal. No boost from enhanced regional trade / cooperation. Peripatetic diplomacy not reflected in surging exports or large direct FDI in creating Shenzhen like enclaves. Parts of the corporate sector drowning before everyone’s eyes, too fearful to say anything, except Glug, glug.


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