India's Low Growth Amidst High Inflation - Daily Current Affair Article

CONTEXT:

The last two years have been extremely bad for the Indian Economy, giving a low growth and high inflation situation. With the combination of factors like low demand, less employment, decreased salaries and increased number of unemployed persons, the Corona pandemic severely hit the country, health-wise, mentally and economically as well.

DIFFERENT ECONOMIC APPROACHES TOWARDS GROWTH

LAISSEZ-FAIRE POLICY

  • Some economists are of the view that the Indian economy will revive on its own after this on-going bust in the economy, citing example of the Great Depression.
  • The term 'laissez-faire' in french means 'let do' or 'leave alone'.
  • This approach restricts the government to do anything to regulate the market forces and says to let the market flow on its own mood.
  • It believes that when done so, the laws of supply and demand will efficiently direct the production of goods and services.
  • Former U.S. President Herbert Hoover was a famous proponent of laissez-faire policies.

Arguments in favour of laissez-faire policy:

  • It allows free and fair competition to companies in the market.
  • Provides freedom to the companies to set prices according to what they deem fit
  • Free competition ensures lower prices and better quality products to the consumers.
  • Without interventions from the government side, there's always a way to innovation.

KEYNESIAN POLICY

  • Supporting the expansionary fiscal policy, this approach calls for the government to implement policies to regulate demand.
  • It believes that consumer demand is the primary force in driving the economy towards growth.
  • This is achieved by a series of efforts like government spending on infrastructure, unemployment benefits, and education.
  • The British economist John Maynard Keynes developed this theory in the 1930s.
  • President Franklin D. Roosevelt supported the use of this approach.

Arguments in favour of Keynesian policy:

  • This creates employment opportunities again( due to government spending) lost during the downward spiral of the economy.
  • When the government is present to support, the bank is more active in providing loans during the times of recession.
  • It also advises the government to cut deficits and to prevent increase in demand that leads to inflation.

WHY LAISSEZ-FAIRE POLICY ISN'T SUITABLE FOR INDIA NOW?

Some economists and financial analysts observe that acquiring Laissez-faire policy during this period will not help, moreover, will prove disastrous. This is because:

1. Demand:

  • The current situation of bust in the Indian economy lacks consumer demands. Even due to this whole cycle of two years, the employment ratio has decreased. Due to this, consumer spending has drastically decreased. Without government intervention, demand will not be regenerated.
  • The Great Depression had the demand coming due to the Second World War. Current situation doesn't show anything like this.
  • The Global market has a good liquidity flow but the Indian exporters are in disadvantage here as well due to rising freight costs, non-availability of containers and strong rupee relative to major competitors.

2. Inflation

  • The stagnant-to-low growth in the last two quarters have created a statistical phenomenon called "Low Base Effect" whereby any substantial growth now gets cancelled out by the negative growth last year.
  • For measuring Year-over-Year growth, the base effect phenomenon calls to take the previous year’s numbers as the base. Now, with such low base, any little growth percentage seems to be significant but actually the Absolute growth is negligible.

Low market capitalisation in India and inflation

  • The ultra-loose monetary policy can't even help the Indian economy due to the fact that it cannot absorb the enormous capital inflow without asset prices inflating.
  • This, in turn, is due to the fact that most of the Indians don't have equity or bonds that can be cashed on asset inflation.
  • This leads to rich getting richer, and poor getting poorer day by day.

Supply chain bottlenecks

  • The bottlenecks in the supply chain are causing the fuel prices to go high, thereby increasing the price of anything that involves transportation.
  • This also leads to demands of higher salaries, thus, creating a hazardous loop of inflation and depleting growth in the economy.

3. Interest rates

  • Massive expansionary fiscal policy adopted by RBI right now is decreasing interest rates to a very low point, thereby, contributing to inflation rather than creating demands.

4. NPAs

  • All the three above stated factors along with credit availability to leveraged companies rather than MSMEs and SMEs is resulting in huge amount of NPAs.

MINSKY MOMENT

  • India has reached its minsky moment.
  • Coined by the economist, Hyman minsky, the phenomenon states that every credit cycle has three stages:
  • Where the banks or lenders cautiously lend loans
  • Where they lend to their trustworthy debtors
  • Where the asset prices rise and the lenders give loan regardless whether the debtor will pay back the interest, let alone the principal.
  • Now, the Public Sector Unit and several other banks will need capital to adjust their bad loans.

GROWTH RECOMMENDATIONS FOR INDIA

  • Indian government and RBI needs to follow the Keynesian policy
  • The Indian economy needs policies that can drive demand.
  • The Government needs to regulate the market at several fronts.
  • Also, solve the issues faced by the Indian exporters.
  • Financial infusion is needed but not upto the level which contributes to inflation.

Sources

General Studies Paper 3
  • Economy