Home / Opinion / Columns /  Opinion | A demand crisis that calls for an urgent fiscal intervention

It is now obvious that the economy is going through a deep crisis, driven by collapsing demand. It is also clear that it is not cyclical, as the government would like us to believe. The decline in demand is fairly widespread. This is obvious not just from the national accounts estimates, but also from the sales data of several commodities, ranging from automobiles and TV sets to daily-use items such as vests and biscuits. Some companies have shut plants temporarily, resulting in job losses.

None of this is a result only of the financial sector mess or the global uncertainty. It is home-grown, driven essentially by declining incomes. But what is the extent of the decline? The picture is clear in rural areas, where lower output prices on top of higher input prices have hurt agricultural incomes. Real wages for agricultural workers have declined in the last two years, while those for wage workers have stagnated for much of the last five years. That rural India is going through the worst crisis of the last two decades is no longer a matter of debate.

These partly explain declining agricultural prices and the low demand for basic goods such as biscuits, but they don’t explain the falling sales of durable goods such as two-wheelers and TV sets. Rural areas do contribute to their demand, although urban areas are still their major market. Unfortunately, there is limited data on what happened to urban incomes. Unlike rural casual wages, which are available at a monthly frequency, the only robust source of data on urban wages are the National Sample Survey Office employment-unemployment surveys. The last of these was the Periodic Labour Force Survey released this year. These provide data on incomes and earnings of regular workers, which can be further disaggregated by educational categories.

Between 2011-12 and 2017-18, earnings of regular workers declined in both rural and urban areas. Rural regular wages declined by 0.3% per annum, while urban regular wages declined by 1.7%. This is the second time in the last five decades that regular wages have declined in real terms. The first period of decline, between 1999-2000 and 2004-05, was also a phase when the National Democratic Alliance was in power. However, the decline then was marginal, unlike this time.

Compare this with rural areas, where, despite the distress, wages do not show such a sharp decline. What is also worrying is that the decline is sharper in case of regular workers with graduate or higher educational qualifications, who generally represent the middle class. Wages of this section recorded faster growth all through the last five decades, but this time they declined by 3% per annum. This is precisely why the goods and services consumed by the middle class are also witnessing lower demand.

Along with rural distress, these numbers point to two disturbing facts. First, with most categories of workers reporting either stagnant or declining incomes, the credibility of the national accounts estimates is under question. It is likely that they are underestimating the gravity of the situation. Second, the crisis of demand is no longer restricted to rural areas, and is far more widespread than indicated by various data sources. This is partly why cash transfers by the state, such as the scheme for farmers, are unlikely to prove enough to bring demand back to usual levels. This will require a broad-based intervention by the government.

However, the government’s response betrays a lack of urgency that is warranted at this stage. Attributing part of the auto slowdown to millennials using Ola and Uber is not just off the mark, it also suggests a lack of seriousness. The government’s attempts to discredit unfavourable data is also unlikely to resolve the problem, expedient though it may be, politically.

It is now fairly clear that the economy is unlikely to recover soon. But whether the crisis is stopped from worsening depends on the choice of instruments that the government uses to deal with it. So far, the attempt has been to tackle sectoral issues, along with placating the rich. Intervention on the monetary side has been limited and has failed to enthuse investors.

None of these steps will succeed in the absence of a public expenditure-led demand injection, which must be undertaken even if it means breaching the Centre’s fiscal deficit target. The question is not whether the government has the ability to undertake deficit-financing and create demand, but rather, whether it has the political will to acknowledge the gravity of the situation and act before it is too late.

Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi

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