Why is domestic consumption important for Indian economy, especially now? Analyse.

The main causes of the current slow global growth are declining populations, protectionism, de-leveraging and no major productivity-enhancing revolution.

The period between World War II and the financial crisis was characterised by population growth, major investment, productivity gains, increases in global trade and cross-border flows of people — a debt boom. Today, in most countries, these trends are decelerating. There is a decoupling of political needs and economic reality. Most governments are coming up with radical policy experiments for growth.

India has a great opportunity before it. Analysis of the causes of the slowdown in the Indian context would be enlightening. For most countries, a declining population was already on the way prior to the financial crisis. Population growth boosts economic growth through an increase in the workforce, aided by an increase in productivity. India is in the throes of a demographic dividend which would be an impetus to growth, if the new entrants to the work force are productively employed.

Unfortunately, the tech-based productivity revolution largely passed India by, so did — fortunately — the money revolution. India’s debt to GDP ratio is 68 per cent. We are now poised to leapfrog directly into the digital world and reap the productivity gains. The priorities are the ease of doing business, infrastructure improvement, fiscal reforms — such as GST — agriculture reforms, administrative reforms, conservation, labour reforms and the digital revolution. We are moving towards increasing manufacturing’s share in furthering jobs.This, combined with the increase in consumption through workforce increase, should impact both consumption and investment, leading to the delta required to take our GDP past 8 per cent.

With growing political uncertainty in the US, the emergence of protectionist policies and amidst slowdown concerns related to China, countries whose GDP is dependent on exports could find themselves with increased instability. The most affected are those with exports accounting for a high percentage of their GDP and with low domestic demand support.

India appears to be less vulnerable on these fronts.With roughly 59 per cent share in India’s GDP, household consumption spending has been the major driver of economic growth and has, on many occasions, acted as a protective shield to global demand shocks. India also has low reliance on external savings to fund its growth. As per S&P Ratings, the banks are mainly deposit-funded and don’t rely on wholesale funding to grow their loan books.

As is the rule, there will be winners and losers in a changing world. The winners are likely to be countries less reliant on global trade, domestic consumption-driven, with an increasing population, a scope for productivity improvement and a low per capita base. As is the rule, there will be winners and losers in a changing world. The winners are likely to be countries less reliant on global trade, domestic consumption-driven, with an increasing population, a scope for productivity improvement and a low per capita base.

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