How economic slowdown can be countered

THE Indian economy seems to be on a slow downswing — 2024-25 is heading for 6.4 per cent growth against the earlier estimate of 7 per cent. The following financial year is expected to maintain the same trajectory, say a range of global analysts. The economy is clearly on a downward shift.

Even on this lower gear, the economy will be moving at a faster pace than most of the other large countries. So, this slowdown is not worrying the leadership as this will still allow the system to function at a stable state.

But finding the reason for the slowdown and its remedy is important as large sections of the people continue to remain very poor. What is worse is that there is a sharp difference in incomes, with only a small section enjoying the fruits of the country's high economy.

In 2022-23, the top one per cent of the population received 22.6 per cent of India's national income. Plus, there is a rural-urban divide. The per capita consumption expenditure in rural India was Rs 3,773 as compared to Rs 6,459 in urban India. Thus, it is the urban consumption that is doing the heavy lifting.

The key reason for the slowdown is the inadequate consumption. This is particularly so for the urban middle class, which is the key mover for the overall demand. This will result in slack for consumption-producing businesses. These will cease to go ahead at full steam. As a result, the firms will hire fewer workers. This will slacken demand and heighten the slowdown in overall consumption.

In rural India, the situation is, if anything, worse. To make ends meet, women in rural households are going out to work to help feed the families by supplementing the men's inadequate wages. But, critically, the women are working in fields, not in factories. So, they are missing out on the higher wages that factory workers earn.

The high growth rate has been enabled by two forces — growing manufacturing and services. But the robust manufacturing is now slacking, as mentioned earlier. Broad-based growth would have taken place if the women in rural areas moved to factories instead of staying in farms.

The high growth has also been enabled by a sharp rise in capital investment in more factories and public infrastructure, the latter made possible through higher public investment.

Better roads, power and railways caused factories to feel optimistic and grow more. This caused cars, trucks and two-wheelers to face booming markets. Hence, it resulted in consumption expenditure by the middle class, particularly in urban areas.

Today, these factories, mostly producing fast-moving consumption goods, are slacking. So, the dream that we have been waiting for — more jobs in factories in urban areas for more women from the rural areas — has paled.

Now, let as look at services, which has been highly robust through the period of high growth. The robust consumption has caused more jobs to be created to service cars, two-wheelers, TV sets etc. As manufacturing slackens, the high growth in services is also likely to see a slowdown.

That leaves us the export services, which are made possible by the software engineers who are going up to the higher level of artificial intelligence. Here also, a negative impact is coming to the fore — nearshoring.

Developed economies are becoming stricter with immigration so that there is a growing need for leading Indian software companies to go in for nearshoring. They are seeking to people development centres in the developed countries themselves with more local talent.

The bright sign is that large companies of developed countries are setting up more and more highly sophisticated global development centres in India, which is creating more high-level engineering jobs.

This is good news for highly skilled Indians, but the total numbers are small. The service exports by these companies and the country are real, but the total impact on national growth is minimal.

In response to the slackening growth and the exigencies of the elections, the government has decided to pay cash grants to women.

This will be positive for the gender economy and demand push for consumption, but this is not a lasting economic solution.

The right way to begin is to reform agriculture. This will raise agricultural productivity and raise farm incomes. This will raise rural consumption and do the economy good. But this will lead to fewer farmhands through greater mechanisation and also better seeds and agricultural practices.

The farmhands will have to be found jobs in urban areas through factories, construction and urban services by being used by municipalities to deploy services like handling of urban dry waste. But the key issue is how factories will find the need to grow capacity and set up new factories.

So, the great need is to grow demand by persuading the Reserve Bank of India to lower interest rates and increase the money supply. The obvious risk will be a spurt in the inflationary level. Right now, the hope is that the rabi crop will deliver the goods, unlike the kharif crop which has been a partial letdown.

The growing money supply will create higher demand for factories, which will hopefully expand their machineries and set up new plants. This will create higher demand for capital goods. The government, with its fiscal slight opening up, will create more supply for higher demand for capital goods, creating more roads, bridges and a better functioning railways.

There is a need to give economic growth a push so that at the end of the day, higher demand will reduce poverty and increase the numbers of the middle class.

But there is a catch in this whole scenario. If the climate lets us down, leading to droughts, floods and untimely rain damaging growing crops, it will all come to naught.

If that happens, hopefully, the government will realise that it is ruinous in the long run to keep setting up coal-fired power plants and will go in more for solar and wind energy projects. That is the path to salvation.