Howdy Economy: ‘Boost income by raising govt expenditure’

As India’s economic woes seemingly go from the bad to worse, NH reached out to Maitreesh Ghatak, Professor, London School of Economics for his opinions and the possible solutions

Maitreesh Ghatak, Professor, London School of Economics
Maitreesh Ghatak, Professor, London School of Economics

Tathagata Bhattacharya

What are the exact problem areas of the Indian economy?

It’s an economic slowdown driven mainly by low consumption and investment demand. This has resulted in rise in unemployment.

What steps are required to bring the economy back on track?

We will have to wait and watch for the Budget. So far, a cut in corporate taxes and announcement of some sector-specific subsidies are all we have heard of.

How can the government ensure consumption picks up?

It can do so by increasing government expenditure that will boost incomes in the hands of people and that would in turn result in rising consumption demand. Investing in infrastructure, more attention to MGNREGA and expanding the PM-Kisan Scheme to include non-farmers are some of the ways this can be done.

Does the government have the fiscal leeway to make a demand side intervention?

It’s a very good question but given that inflation is not an immediate threat, the deficit target can be temporarily breached (which is likely anyway, given the lower than expected tax yields).

Does a decline in rural consumption mean that MGNREGA is not being effective?

I would say that it is one possible factor. MGNREGA after all is a social insurance scheme that kicks in for those who are looking for work but cannot get it in rural areas. It can contribute to rural consumption demand and help provide a boost but the stagnation of farm incomes is one of the main factors behind lower consumption demand.

Do you think instead of lowering corporate taxes, putting a similar amount in the hands of people in terms of direct transfers will help boost demand?

Yes, absolutely, as I indicated above. In the end, the propensity to consume is higher from wage and salaries and not corporate profits.

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