2019: “Tax reduced to 25% for companies with annual turnover of more than 400 crores”
2022: “ Rs 20,000 Crore laid for the Gati Shakti Yojana, the master plan for infrastructural development”
The above stated decisions share the mutual destination, it’s just the approach that differs. The former is termed as a step towards Consumption induced growth whereas the latter emphasis on elevation of investments in the economy. This will, in turn, help reach the desired growth numbers.
Economists debate as to which amongst the two is more effective. The conclusion can only be made once we understand the functionalities of the two.
Firstly is the, as the name suggests, Consumption model which relies on better end user spendings in the economy. This will in turn incentivise the producers to improve their output levels. Consequently the employability level and income are expected to go up. Thereby ensuring growth of the nation.
Government through it’s fiscal measures involving tax cuts and higher expenditure and the central bank through the monetary instruments, try to raise the disposable incomes of individuals. More money in hand, more will be spent by the people.
Investment simply means the money put in either by the government or firms for procurement of capital or creation of new assets. A prime example, as stated above, is the development of infrastructure in the nation. This can create income opportunities for more workers and pull down the unemployment levels. The approach aims at killing two birds with a single stone. That is, raise the production capacity and simultaneously put more money in the hands of the commoners and impact the demand levels positively.
Manier times the government has it’s platter full. Therefore, the corporates and private players both domestic and international need to be encouraged to invest in the economy. This is where the central bank steps in. The bank ensures the loan interest rates are favourable for the corporates through the monetary policy instrument. The government can also make suitable conditions for attracting investors from all over the world by promising easy accessibility to the factors of production. This involves attainability of cheap and skilled labour. Simple land acquisition laws. Strong transportation and communication network. Provision of 24×7 electricity and water supply and the list is endless.
Although both sound good in theory, reality is a bit different. Research shows the investment model works for achieving long-term sustainable economic boom. The logic behind this is simple, clear and straightforward.
If the government and the central bank, through their respective policy instruments, create excess demand levels in the country, it can lead to a vicious cycle as well. Rise in aggregate demand levels due to higher purchasing power of individuals can pave for inflation in the economy. In the short-run, higher demand can give rise to more imports. Thereby widening the current account deficits of the nation. Unless there is subsequent upsurge in the supply levels, the development of the nation can be hampered. Demand rises almost instantaneously whereas time is needed to rev up the production capacity. Hence, it’s nearly impossible to have a fine tuning between demand and supply. So, the consumption model is not preferred to achieve long-term growth targets.
On the other hand, investment is believed to increase supply in tandem with demand. India has a history of consumption based growth. Up until 2019, there was inclination towards raising the demand levels in the economy. It was only after the pandemic that the government decided to be more attentive towards the investment side. COVID19 acted as an inflection point to bring a change in the country’s trajectory for growth. Since maximum brunt was experienced by the households and government during lockdown, consumption-led growth came under questioning. Along with this, many companies gained strong financial positioning. Thereby providing momentum to the investment model. It is believed that the household demand is likely to remain subdued for the coming years. Thereby, further streagthening the confidence of the executives in investment uptick for growth.
“Extremes are easy, strive for balance”
In the real world, economies function in a complex and complicated manner. Therefore, policymakers try to strike a balance between the two models.
Keeping this in mind, the administrations across the world try numerous permutations and combinations so as to provide the best standards of living and quality of life for their citizens.
- Consumption as driver of growth
Kharroubi, E. and Kohlscheen, E., 2022. Consumption-led expansions. [online] Bis.org. Available at: <https://www.bis.org/publ/qtrpdf/r_qt1703e.htm> [Accessed 9 May 2022].
(Kharroubi and Kohlscheen, 2022)
- Budget 2022
2022. [online] Available at: <https://www.indiabudget.gov.in/doc/bh1.pdf> [Accessed 9 May 2022].
- Budget 2019
2022. [online] Available at: <https://www.indiabudget.gov.in/budget2019-20/> [Accessed 9 May 2022].
- Transition in growth model
Business-standard.com. 2022. Covid may push India growth model from consumption driven to investment-led. [online] Available at: <https://www.business-standard.com/article/economy-policy/covid-may-push-india-growth-model-from-consumption-driven-to-investment-led-121091800313_1.html> [Accessed 9 May 2022].
(Covid may push India growth model from consumption driven to investment-led, 2022)