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The ‘Y’ factor in India’s economy: Fiscal stimulus not enough, the country needs jobs to spur growth

The ‘Y’ factor in India’s economy: Fiscal stimulus not enough, the country needs jobs to spur growth

The ‘Y’ factor in India’s economy: Fiscal stimulus not enough, the country needs jobs to spur growth
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By Kartik Malhotra  Sept 24, 2019 6:58:31 AM IST (Updated)

It takes a trillion to tango in India’s 5-trillion dollar dream. Mindboggling zeroes to make the economy equation work. A juggernaut of robbing Peter to pay Paul in order to keep the books tidy. It is risky business and calls for shrewd politics and clever economics to work in tandem.

It takes a trillion to tango in India’s 5-trillion dollar dream. Mindboggling zeroes to make the economy equation work. A juggernaut of robbing Peter to pay Paul in order to keep the books tidy. It is risky business and calls for shrewd politics and clever economics to work in tandem.

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Let’s look at the tricky trillion triangle.
Tax collection deficit of Rs 1.5 trillion; RBI’s Rs 1.76 trillion bonanza to the government; the government’s Rs 1.45 trillion stimulus to India Inc.
Add to this, the government’s budgeted infrastructure expenditure of Rs 1 trillion to continue as planned.
Economists define GDP as Y = C + I + G + (X - M)
Simply put, GDP (
Y) is a function of Consumption (consumer spending), Investments (not savings), Government spending (government expenditure) and Net Exports (Export - Import).
This trillion trilogy seems simple enough – tax deficit covered by the central bank, government expenditure continues unabated, tax sops invite more investments while higher discounts (should) boost consumption. The year ends well on books, but is the growth real?
A student of economics would find this movement of money fascinating with negligible circulation of cash. A student of politics would see the stock market movement as a result of such stimuli as motivated intervention.
But these isolated instances are actually more interconnected and at the intersection of politics and economics with one singular view of not letting the growth rate fall, ‘cyclical downturn’ notwithstanding.
Will this intervention keep the growth rate ticking as anticipated by Finance Minister Nirmala Sitharaman’s budget speech on July 5, 2019 and will the corporate benefits result in consumerism coming back needs to be seen.
The GDP equation
Y = C + I + G + (X-M). Let’s take this equation in two scenarios – one with and one without the stimuli.
Pre-stimuli equation
GDP (Y) = Negative Consumption (given the lull in sales from cars to biscuits) + Negative Investment (slowdown in FIIs, industry expansion plans on hold, housing market down) + Negative Government Spending (remember the government’s income was down by a Rs 1.5 trillion tax deficit) + Net Exports more or less constant (largely on commodities).
By pure consumer-driven economics, there was no denying that the Indian economy was heading towards a downward spiral. Lower spending by consumers resulting in lesser income for private sector, thus reduced taxes and hence lower tax revenue for the government leading to a likely cut in government spending while essential commodities trading at par. Y was going to go south.
Post-stimuli equation
GDP (Y) = Consumption (this needs deeper analysis) + Positive Investment (lowered taxes to invite domestic and international investments) + Government spending (to continue at 1 trillion rupees on infrastructure) + Net Exports more or less constant (largely on commodities)
Keeping Consumption constant, GDP is likely to surge with greater investments and government spending. The target may be reached, but will it be sustainable and what it will do for consumption?
The consumption story
Stimulus is seldom an answer to spur growth. As this column has argued before, in times of uncertainty, consumers like to hold on to cash. The longer they hold on, the slower the growth revival.
To address the consumption side, one needs to know for certain if the downturn is cyclical or structural. If cyclical, then the upside will be back soon and the stimuli will expedite the recovery. But if the problem is more deep-rooted, then recovery could be much longer and the stimuli will only delay the process.
In the short to medium term, companies will invest and foreign investments too will trickle in with globally competitive tax rates. But consumers making or deferring purchase decisions will depend on how they perceive the employment market beyond the medium term.
For real growth, the country needs real jobs to be created. Only then will the consumer sentiment bounce back and the upswing begin.
The market rally will flatten out if demand dwindles. With reduced taxes, there is more wealth in the hands of the supplier, so prices will fall pushing the price equilibrium lower.
This will result in lowered revenue for companies and hence, even lower taxes for the government. To compensate for smaller unit economics, volumes will need to be pushed up – which, with limited demand, may be an uphill task.
The jubilation of the stock markets should not be misconstrued as consumer optimism. Retail investors and retail shoppers act and react differently.
Stimulus will steer the course of the economy in the right direction only as long as it helps create jobs and boost demand. Zeroes on the right side of the 5-trillion dollar dream will manifest only when there is a perfect marriage between the demand-supply dynamics. If not, the noble ambition runs the risk of coming to a naught.
Addressing the supply side is addressing only half the problem.
Kartik Malhotra is Senior Executive Producer & Editor, Special Projects at Network 18. He is an alumnus of IIM Lucknow and, when not behind the camera, indulges in armchair analysis of strategy and technology.
Read his columns here.
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