Where demand has gone (Informal economy needs spending boost now)

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 Where demand has gone (Informal economy needs spending boost now)

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• Right in middle of slowdown: There are two options for the govt. – go for fiscal expansion, to boost demand OR carry deep reforms to increase productivity and growth. India is not in a recession, but a slowdown, with real and nominal GDPs for 2019-20 expected at 5% and 7.5%, resp.
• Leaked NSS CES survey: The Consumption Expenditure Survey report showed that real monthly per capita consumption expenditure fell between 2011-12 to 2017-18. Overall decline (rural + urban) was 3.7 per cent.
• Who is contributing what to GDP: The above fact is striking as contraction never happened before. Given that, where is GDP growth coming from, because PFCE is 60% of GDP engine. (Investment - GFCF - is 30% of GDP which is growing at just 1%)
• Government expenditure: Overall, it is just 10% of the GDP, and did grow fast (at 10%). So investment and govt. expenditure added up to 1.3% to GDP growth rate. So for that 5% annual real GDP growth, balance has to come from consumer expenditure.
• NSS versus NAS: So as per NSS data, consumption expenditure is shrinking, but as per NAS (National Accounts Statistics) it is growing at more than 5% (otherwise real GDP growth of 5% is impossible). The gap always existed in these two estimates, but not so wide. (In 1970s, NSS was 90% of NAS, and in 2017-18, NSS data was 32% of NAS)
• Some big factors:

1. A large informal economy brings discrepancies in the two data sets. Although informal is 50% of GDP and 85% of workforce, yet growth in informal is extrapolated from formal sector numbers. So it's pure guesswork.
2. This informal sector will make an expansionary fiscal policy more effective, far more than in the formal sector. Why? As a large part of population is in informal sector, are poorer, and spend more of income on consumption. They have been hit by poverty far more.
3. Fiscal expansion's scope is less, as govt is running a large deficit already. Also, new taxes are not possible, and borrowings are at the peak. So, if deficits expand now, since formal sector demand estimates will be used to gauge impact, it will look bad. But informal will start showing more demand in mid-term, and hence is advisable. (so go for fiscal expansion).

• Cutting income taxes: Corporate and Personal income taxes are just 3.3% and 2.5% of the GDP. Cutting these impacts a small per cent of population, with little overall effect. The richest (who pay the most) won't start spending more due to cuts, and the low rung will use the cuts to pay back their loans.
• Respect informal sector: The get Indian economy up and running, an expansionary fiscal policy to boost aggregate demand is the only way forward.
• Summary : To end the economic slowdown, the govt must confidently go for fiscal expansion, keeping in mind the positive results that informal sector will generate.

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