Dealing with Demand Shock in Economy – UPSC GS3

Factors leading to demand shock in Indian economy     
  • Pre-pandemic economic slowdown: Growth rate of the economy has been on a decline since Q1 2018-19, and 2020-21 ended with negative growth of (–)7.3%.

  • Stagnant private consumption: Private consumption contributes a major chunk of GDP, and stagnant private consumption during recession indicating people are consuming less.

  • A fall in per-capita income: Most Indians have become poorer. They are poorer today than they were three years ago (2017-18).

  • Precarious state of employment: Recent Centre for Monitoring Indian Economy (CMIE) data has pointed to a loss of 2.2 crore jobs in April and May 2021.
    • Unemployment rate that was 5.48% in June 2018 has once again spiked to 11.86%.
    • Falling Labour Force Participation Rate from 42.87% in June 2018 to 40.40% in March 2021.
  • Rising poverty: According to the study ‘State of Working India 2021’ by Azim Premji University, 23 crore people have gone below the poverty line, and average household borrowing has increased.
Way forward
  • Focus on the basics: Which includes:
    • A strong fiscal stimulus and fiscal expansion.
    • Cash transfers to the poor.
    • Liberal distribution of free rations.
    • Universal free vaccination.
    • Substantial help to MSMEs, including capital grants, interest-free loans, moratoria, debt forgiveness, etc.
  • Redesign a meaningful ‘stimulus package’: GoI must augment expenditure by using its cash surplus parked with RBI, borrowing more and, if necessary, monetising part of the deficit by printing money.
    • The sovereign power to create money must be exercised during a national calamity.
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