Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS Mains 2019 General Studies Paper – 3)
The Economic Survey 2018-19 states that the economy witnessed a gradual transition from a period of high and variable inflation to a more stable and low level of inflation in period 2014-18. However, in the current fiscal quarter, the headline inflation has fallen to the lowest value and also there is a reduction in Gross Value Added (GVA). This has raised various debates around the use of inflation targeted monetary policy and its impact on the overall economy.
Points to agree
- Provided policy stability: Steady growth rate and low inflation has provided better market conditions for investment and production planning.
- More equitable: Inflation impacts the poor more as it decreases their purchasing power. Low inflation increases disposable income and therefore increases investment in the economy.
- Maintaining the fiscal deficit to the appropriate level: Controlled price level has helped in reducing subsidies and unnecessary tax cuts.
- Helping urban economy: Low inflation rate has kept the living cost in urban areas to a manageable level. This has provided relief to the middle class.
Points to disagree
- Fall in consumption demand: Decreasing Consumer Price Index (CPI) clearly shows the receding disposable income in rural areas which can be clearly seen in the Q2 GDP growth rate falling to 5%.
- Reduction in investment: The contraction of the economy due to falling consumption has reduced the scope of further investment.
- Double Balance Sheet Problem: Due to the slowdown, various corporates are facing the revenue shortage to pay back the interest, leading to NPA problem faced by the banks.
- Revenue Shortfall of the Government: Due to less income generation in the economy, direct tax revenue has receded. This reduces government legroom for more public expenditure.
Road ahead
- Increasing liquidity: The recent step to slash the corporate tax and providing loans to MSMEs is the desired initiative to infuse more liquidity in the economy and increase investment.
- Increasing public expenditure: Schemes like MGNREGS, rural housing etc. should be implemented more effectively so as to give a boost to rural income generation and thus demand creation.
- Promoting labour-intensive industries such as Food Processing Industries, Leather Industries, etc. in order to create demand in the economy and provide employment to youths.
Current monetary policy easing should be continued to give a renewed push to the investment cycle of Indian economy. Inflation is a double edged sword therefore a sustainable range of the inflation rate of 4-6% should be maintained so that maximum income generation could happen in the economy.
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