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How can the Budget arrest growth decline?

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 (Source – The Hindu, International Edition – Page No. – 10)

Topic: GS3 – Indian Economy
Context
  • India’s economic slowdown is marked by weak private consumption and investment despite rising capital expenditure.
  • A shift in fiscal policy may be needed to revive growth.

Current Economic Situation

  • India’s GDP growth rate is lower than expected, despite increased government capital expenditure.
  • The Economic Survey highlighted concerns about sluggish private consumption and investment.
  • Major economic shocks, such as demonetization, GST implementation, and COVID-19 lockdowns, have contributed to the slowdown.

Three Phases of Post-Reform Growth

  • 1991-2004: Initial phase of economic reforms with moderate growth.
  • 2004-2011: High growth with poverty reduction, increased state intervention, and welfare schemes.
  • 2011-2023: Economic slowdown, particularly after 2019, with weak private consumption and investment.

Reasons for High Growth (2004-2011)

  • During this phase, the share of consumption of the richest 20% declined, while the bottom 80% saw an increase in consumption.
  • Government policies played a key role in boosting demand among lower-income groups.
  • Increased spending on social welfare programs had a strong income and employment multiplier effect.
  • Schemes like NREGA ensured job creation and wage growth, particularly in rural areas.
  • Investment in agriculture and rural development further strengthened the economy.
Capital vs. Revenue Expenditure
  • Capital expenditure (Capex): Includes spending on large infrastructure projects like dams and nuclear plants.
    • Limited impact on immediate demand and employment.
    • May lead to higher imports, reducing its domestic economic benefits.
  • Revenue expenditure: Includes spending on social programs like NREGA and pensions.
    • Directly boosts consumption among lower-income groups.
    • Creates a stronger demand-driven multiplier effect.
  • During the 2004-2011 period, the government increased revenue spending, leading to broad-based economic benefits.

Government’s Response to Slowdown

  • The government has primarily focused on capital expenditure to revive growth.
  • Despite corporate tax cuts from 30% to 22% in 2019, private investment has not increased.
  • Weak demand and low capacity utilization prevent companies from investing further.
  • The expectation that capex would attract private investment has not materialized.

Proposed Solutions

  • The government should increase revenue expenditure to boost demand and employment.
  • Focus should shift to labour-intensive capital projects rather than capital-intensive ones.
  • Fiscal expenditure as a share of GDP needs to rise to sustain economic recovery.
  • A balance between capital and revenue expenditure is essential for long-term growth.

Conclusion

  • The upcoming budget will indicate whether the government prioritizes market-friendly policies or social welfare.
  • A policy shift toward increasing revenue spending could help reverse the economic slowdown and improve living conditions.
PYQ: Distinguish between capital budget and revenue budget. Explain the components of both these Budgets. (150 words/10m) (UPSC CSE (M) GS-3 2021)
Practice Question:  Examine the role of fiscal policy in addressing India’s economic slowdown. How can a shift towards revenue expenditure boost demand and employment? (250 Words /15 marks)

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