Under economic crisis, any theory to revive the economy can be misapplied that can end the trust in the government. Because of this, there is a strong relationship between economics and politics.
If consumer spending is low, firms end up having unsold goods. As a result, they cut back on investment. Low investment results in people losing jobs and higher unemployment mean further lower spending. This is the major cause of concern due to which India is going through demand drought phase.
As per Keynes, after the credit crunch, there is a need for expansionary fiscal policy (government spending) to increase the demand. This kind of policy results in government debt, which is otherwise hard to push. But now government spending can increase the sentiments of the private sector also and they can end up spending too. But major criticism to this is the political cost. To revive the economy, the government can end up in corrupt spending i.e on projects with vested interests.
Understanding Fiscal Policy and Fiscal Deficit
Fiscal Policy, also called Budgetary Policy, comprises of government’s Revenue, Expenditure and Borrowings. Fiscal stimulus package means that there is expenditure increase or tax cuts or both.
|Revenue Budget||Capital Budget|
|Revenue Receipt |
(There is no repayment liability)
|Capital Receipt |
(There is repayment liability)
| || |
|Revenue Expenditure |
| || |
| Now Fiscal Deficit = Revenue Receipt + non financial liability of capital expenditure – Total Expenditure |
(grants, sale of assets , Disinvestment proceeds)
Fiscal consolidation started from FRBM act, 2003 and was successful. Fiscal Deficit is Gross Fiscal Deficit to GDP ratio declined from 4.5 per cent in 2013-14 to 3.4 per cent in 2018-19. FRBM Act played key role in the reduction.
If Fiscal deficit is due to capital expenditure then need not worry because capital expenditure in due course will start generating revenues. In India, it is due to revenue expenditure. This is low priority expenditure and non targeted subsidies. Then it calls for reforming the tax system, downsizing government and reducing wasteful expenditure.
But right now the Indian government is under doldrums whether to keep the fiscal deficit under check (by decreasing expenditure) or foster economic growth through tax cuts and higher expenditure (there is need to increase the consumer demand by giving money in their hands). Corporate tax has already been reduced but tax cuts work best when applied to individual income. Tax reduction can increase the money supply, especially of poor and middle-class families.
In India, the growth has come down to 5% in the first quarter of 2019-2020. Structural reforms like demonetisation and GST has disrupted the economy. Rural and agricultural distress is not unknown. Overall agricultural and wage growth has stagnated that too in a country where more than 50% population is rural and dependent on the agriculture sector. On the global front, trade wars between USA and China, the rise in crude oil prices, uncertainty related to Brexit, have a ripple effect on the Indian economy too.
The main aim is to bring back liquidity in the market as households income has declined and future expectations are not in favour to spur the demand. Moreover, the future profitability of projects has declined causing overall investment to decrease. Extreme climatic conditions like floods further hamper the livelihood. India, as a country has a long way to go and being developing in nature where growth opportunities are many, 5% growth, is dismay.
Signs of Slow Down In Indian Economy :
- Greater income means greater savings. In a developing country like India, savings are required to finance investments that help in growth. The declining rate of savings is a cause of concern. If savings are low why people are not spending? Perhaps spending pattern of people is not creating demand for goods or maybe unemployment has resulted in a reduction in overall income.
- Sectors generating large employment such as automobile is facing a downturn. Slump in FMCG (fast-moving consumer goods) sector and cases like drop in demand for biscuits which is consumer good of low value indicates that purchasing capacity has declined.
- Rural sector distress – unproductive agricultural operations as well as low inflation in the rural economy. Low inflation is a sign of weak demand. Moderately high inflation signals that there is consumption that further instigates investment. Weak demand means that producers are discouraged to make investments and that hampers job creation.
- Rise of NPAs (Non Performing Assets) has reduced credit growth and lack of availability of credit results in a sluggish growth in the private sector resulting in industrial crisis. NBFC (Non-banking financial companies) are facing liquidity crisis too. They don’t take any deposits but specialise in particular fields.
- Structural Changes like Demonetisation and high rates of GST – Affecting small business and the informal sector; less income in the hands of the people. One cannot rule out the fact that certain sectors in India are cash-driven and cashless transactions will drive away the demand.