Does The Economy Need More People?

Business Standard     4th September 2021     Save    
QEP Pocket Notes

Context: In the light of recent latest quarterly GDP growth numbers suggesting 20% growth from last year, the distribution of income and therefore the pattern of economic growth have become a matter of even greater than usual concern.

Positive growth trends

  • Impressive exports growth: Which in April-August was a spectacular 67 per cent. Unlike GDP, exports have grown also when compared to a year earlier, by a reassuring 23 per cent.
    • Some of this growth comes from the resurgence in global economic activity, and the effect of a commodity price boom.

Concerns underlying the economic growth: Due to decrease in consumer demand denoted by following parameters - 

  • Falling private consumption: Private consumption in April-June this year was lower than four years earlier, i.e. in 2017-18. Reasons – 
    • Introduction of goods and services tax, which, it is generally acknowledged, disrupted large swathes of employment-intensive small and medium enterprises.
    • The nationwide lockdown towards the end of 2019-20 caused large-scale unemployment and reverse migration from urban to rural areas.
  • Rising inequality: A Pew survey’s findings, reported in March, that the numbers in India’s middle class have shrunk by as much as a third, with 32 million slipping into the lower-income category while 35 million have slipped from that category to join the ranks of the poor, whose numbers have therefore swelled.
    • It is not enough to focus on GDP — although that one number, reduced to a per head basis, remains the primary indicator of well-being because it is almost always positively correlated with standards of living and the indicators of health and education.
  • Rising unemployment: Economic performance too gets affected if large numbers are out of work, or at such low levels of income as to force under-consumption. Both affect aggregate demand, restrain capital investment, and therefore reduce the economy’s growth potential.

Conclusion: Henry Ford could see in 1914 that paying his workers better would lay the groundwork for boosting consumer demand. That is what the government should be trying to engineer today, along with a lowering of the currently high levels of unemployment.

QEP Pocket Notes