Why demand needs to be the focus (Consumer sentiment should be the focus of policymakers)

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 Why demand needs to be the focus (Consumer sentiment should be the focus of policymakers)

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• The persistent slowdown : India faced a continuing slowdown through 2018 and 2019, culminating with a 5% quarterly GDP growth rate, y-o-y, for Q1 of FY 2019-20. An alarmed govt. tried everything after August 2019, except directly addressing the demand side of the problem.
• PCE : The private consumption expenditure in India contributes to more than 50% of GDP. It is the core of all demand. It grew just by 3.1%, an 18-quarter low. Demand slowdown pervaded multiple sectors.
• What led to this slowdown :

1. A lack of jobs, and thin real wage growth from whatever jobs are available
2. Continuing rural distress
3. Widening inequality
4. RBI's successful targeting of inflation!

• RBI's inflation target : It may have shot the growth engine dead, by focussing on keeping inflation below 4% CPI, with a broad band of 2-6% target. Low inflation has led to lower nominal growth (in current prices), and hence lower tax receipts. That leads to lower govt. spends. Low inflation leads to low salary revision too. That makes wage-earners wary of spending more on discretionary items.
• Rural versus urban : Rural demand slowdown is severe, as compared to being far ahead of urban, earlier. FMCG companies are directly hit.
• Consumer sentiment : The govt. needs to bring back a positive consumer sentiment through a mix of economic, monetary and fiscal measures. The socio-political climate has to be "Feel-Good" as well. The RBI consumer confidence survey numbers are not good at all.
• Monetary versus Fiscal : While lower borrowing costs and credit availability are very important, the fiscal measures are more crucial.

1. Targeted tax breaks
2. Non-tax sops like the 2009 US "cash for clunkers" scheme (buy a new vehicle and trade in your old one, get incentives)

• Corporate tax rate cuts : When the govt. cut corporate taxes in Sept. 2019, the hope was that corporates will now think of fresh capital investments. But companies may not add capacity when demand for their manufactured goods is weak. So "demand resurgence" is key, again.
• MGNREGA funding : PM-KISAN is good, but what's more urgently needed is a reinvigoration of the MGNREGA scheme. Raise wages there, and put proper funding in place.
• The lesser evil : Even if the fiscal deficit grows (by tax cuts etc.) or inflation re-arrives (by more govt. expenditures), it would be a lesser evil than stalling of demand and economy entering into a recession. Let reflation happen, demand buoyancy return, and revenues will grow surely.
• Summary : All else is secondary for now, but for focussing single-mindedly on demand reflation through a mix of govt. moves.

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