Why in the News?

The growth rate is lower than what the government had expected. Looking at past trends, the 2004-2011 period had high growth and poverty reduction, supported by welfare programs and government interventions.

Context: 

• The World Bank forecasts India’s GDP growth to soften to 6.5% for the fiscal year 2024-25, down from previous expectations of 7%. This reflects a slowdown in investment and weak manufacturing growth.
• The International Monetary Fund (IMF) has also revised its growth forecast for India to 7% for FY24 and 6.5% for FY25, citing robust domestic demand but acknowledging challenges ahead

How did the period from 2004 to 2011 have a consistently high growth rate?

• State Intervention and Welfare Programs: This period saw a revival of state interventions through rights-based legislation and welfare schemes, which contributed to economic growth and reduced absolute poverty.
  • Notably, programs like the National Rural Employment Guarantee Act (NREGA) provided jobs and set higher wage floors, benefiting the rural poor.
• Rising Consumption Among Lower Income Groups: Despite increasing income inequality, the consumption share of the bottom 80% of the population grew faster than that of the richest 20%. This was facilitated by targeted fiscal policies that favoured lower-income groups, enhancing their consumption capacity.

• Increased Fiscal Expenditure on Social Services: There was a significant rise in social services and developmental expenditures during this time, which directly impacted consumption patterns positively across various commodity categories for lower-income groups.

Does the nature of fiscal expenditure also matter when it comes to private consumption? 

• Capital Expenditure vs. Revenue Expenditure:
  • Capital Expenditure (Capex) (e.g., infrastructure projects) primarily benefits high-income groups and corporations, with a lower short-term impact on consumption.
  • Revenue Expenditure (e.g., social welfare, wages, and pensions) immediately boosts demand by increasing disposable income among lower-income groups.
• Leakages in Capex: Large-scale projects often involve imports (e.g., heavy machinery), leading to capital outflows instead of stimulating the domestic economy.
• Higher Consumption Propensity of Lower-Income Groups: Money spent on welfare programs reaches people with a higher tendency to spend, leading to a larger multiplier effect on domestic demand.

How would an increase in revenue expenditure, particularly in the social sector, help? (Way forward)

• Higher Incomes for Workers: By providing better wages and job opportunities through social programs, disposable income among lower-income populations would rise, thereby boosting overall consumption levels.
• Stimulating Private Investment: Enhanced consumer demand can create a conducive environment for businesses to invest. As workers have more income to spend, businesses may respond by increasing production capacity, leading to a cycle of investment and growth1.
• Reversing Economic Slowdown: A strategic shift towards increasing revenue expenditure can help combat the current economic slowdown by fostering a more inclusive growth model that benefits a broader segment of society.

Mains PYQ:

Q “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (UPSC IAS/2015)

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