Demand deficiency: GDP data flags an urgent need to revitalise private consumption


The GDP data for the second quarter of 2020-21 conveys a mixed picture. GDP shrank 7.5% to Rs 33.14 lakh crore. This is the first recession, or two successive quarters of contraction, since quarterly data became available. But the decline is lower than the 9.8% forecast by RBI in its monetary policy last month. To that extent, the silver lining is that the recovery from the first quarter’s contraction of 23.9% is a bit better than expected. Granular data however shows that the economy remains in a bad shape. This really calls for smart intervention by the Centre.

Strength of private consumption is an important economic indicator. It is the largest component of GDP and it fell in the second quarter by 11.3% to Rs 17.96 lakh crore. This is telling of what has happened to the purchasing power of consumers. There is little doubt that the pandemic induced economic collapse, coming of course on the heels of two successive years of an economic slowdown, has resulted in serious damage. It’s only agriculture which has largely escaped damage, which means it’s imperative the government address anxiety over agricultural reforms before this hurts the sector.

Since the lockdown was imposed in the last week of March, the government has also got cracking on pending reforms in factor markets such as labour and has designed packages to encourage manufacturing competitiveness. These reforms are largely aimed at removing bottlenecks which restrain the supply side of the economy. The implicit assumption is that reforms will catalyse private investment and set off a virtuous cycle. There is a catch here. A significant part of the private investment will be influenced by the strength of domestic demand. Hence, the Atmanirbhar Bharat idea spelt out by Prime Minister Narendra Modi included domestic demand as one of its pillars.

The immediate task is for the government to address weak domestic demand. Many of the supply side measures will fulfil their potential only if there are clear signs of a revival in domestic demand. This calls for shuffling of prioritisation, if necessary, to focus on revival of domestic demand. Even if the government does not want to expand its borrowing programme in the residual four months of the financial year, there are other ways to revive purchasing power. For example, hastening execution of its existing infrastructure projects needs top priority as this will address the current economic challenges.

This piece appeared as an editorial opinion in the print edition of The Times of India.

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