What can a new government do to tackle demand slump?

The government that will be in place a few days from now will face a consumption slowdown. Given the role of consumption in driving the Indian economy in the past few years

Mint analyses what a slowdown means and whether the government can do much about it.

What are the indicators of an economic slowdown?

Sales of cars, scooters, motorcycles and tractors have contracted over the last few months, in comparison to the same period in 2018. There is also a slowdown in the growth of sales of consumer goods that has fast-moving consumer goods firms worried. This is even more significant as it is happening at a time when India is going through the world’s costliest election ever, with political parties pumping huge amounts of money into the economy. This shows that Indian consumers are holding on to their money and not spending it as fast as they used to earlier, which is a cause for concern.

What are the other indicators of a slowdown?

Non-oil, non-gold, non-silver imports are a good indicator of consumer demand. A study of these imports from April 2017 shows that they have contracted between January and April 2019, in comparison to the last year. This is similar to the contraction in other sectors. It just reaffirms the consumption slowdown in the economy during this period and adds to fears that one of the biggest tasks of the new government will be to tackle the slowdown. One man’s spending is another man’s income. This cycle creates economic growth. But there is a problem in this regard.

Why is consumption growth important?

Private consumption expenditure was expected to form 59.5% of the Indian economy in FY19. This was likely to grow by 12.4%. Consumption growth is a major driver of economic growth.

What does a slowdown in consumption mean for India?

A consumption slowdown will push economic growth down—likely to below 7% a year. Consumption has been one part of the economy that has been robust in the last few years. Its slowdown means lower tax collections, especially in terms of the goods and services tax. This puts pressure on government expenditure and pushes up government borrowings. It is also likely to bump up interest rates, though much of the talk these days is about lower interest rates.

What can the government do?

One suggestion that has been made is that the government find ways to raise expenditure. If this is done, economic growth is bound to pick up. But such an approach was taken during and after the 2008 financial crisis. It did push up growth in the short term, but in the long run the economy faced inflation, high interest rates and the problem of huge bad loans of banks. Sometimes, riding the status quo makes sense.

*Vivek Kaul is an economist and the author of the Easy Money trilogy.