16

There are many important purposes of macroeconomics. But the foremost of these is attaining full employment. Full employment does not only mean full-employment of labour - it also includes full utilisation of available resources. The Indian economy has been under stress for quite some time. Even before the onset of the pandemic, the economy had been slowing down. Now the question is how should one understand whether an economy has been reviving or not.

The common indicator may be the growth rate of GDP. Some may consider rising equity markets, exports prospects and some other factors to also be indicators. But in a pandemic situation, when economic activities come to a halt, a large extent of these indicators do not reflect the actual situation. According to many economists, two indicators - the employment situation of labour and rising gross fixed capital formation GFCF) reflect the economic trends better. Why are these two indicators so important in the present situation of the Indian economy? The volume of output or income of a country depends on four factors - consumption expenditure, expenditure on new investment, value of export and imports and the total expenditure of the government (including deficit financing and other sources of expenditure). In this situation, government spending is considerably high. Moreover, export depends on the condition of the other economies where India has little to interfere. So the rest two, that is, indicators like employment generation and volume of GFCF are the most important indicators of economic revival. Therefore, one has to find out where the Indian economy stands in respect to these two sectors.

The employment scenario

The government has been careful about maintaining sufficient liquidity in the market and employment level. Sufficient liquidity means easy transactions and various other activities in an economy. At the same time, if business activities including new investment is easier then output would increase provided there is no problem of availability of labour supply. The peculiarity of the present pandemic economy has been the sudden halt of both supply and demand sides of production. In the earlier recessionary situations, in most of the cases the problem emerged from demand deficiency. That means there had been excess supply of products that impacted the other sectors - like the financial sector - which in turn impacted real sectors like output and labour market.

Private consumption

The private consumption of India now comprises more than 55% of GDP of economic expenditure. Even in 2020-21, while the discretionary expenditure had been low the share of the private consumption was little over 55%. If one considers the per-capita consumption in India from 2017-18 to 2020-21 the figures are `1,00,268, `1,05,525, `1,08,645 and `99,694 respectively (former Union Finance Minister, P Chidambaram, ET, 4 June, 2021). It naturally means that the Indians have become poorer than they were three years ago. An important study by Azim Premji University, titled ‘State of Working India, 2021’ observed that as many as 23 crore people in India have gone below the poverty line and average household borrowing has increased.

One of the most important reasons behind this has been the increase in poverty due to rise in unemployment. Data by Centre for Monitoring Indian Economy (CMIE) points out that 2.2 crore jobs have been lost in April and May, 2021 and unemployment has climbed to 11.86%. In the recent normal year which was 2018, it was 5.48%. Another survey observed that the workers’ participation rate has fallen by about 2.5% to reach 40.40%. The woman participation rate has fallen during the pandemic due mainly to household constraints.

Gross fixed capital formation status

The GFCF has been a very important indicator to judge the performance of an economy. GFCF indicates the net addition to fixed assets like plant and machinery, land, houses, buildings for business, roads and other infrastructure etc. It does not include financial assets. The GFCF fell by about 43% in June 2020. But it increased by 2.56% in Q3 2020. But in the ongoing second wave, the GFCF can be expected to be very low or even negative. So economic revival of a significant level will remain a far cry.   

The subdued demand for bank credit

The level of demand for bank credit has been a prominent indicator of economic growth. But it has come down to a 59 years low in the last FY. In the present fiscal - at the end of May 21- the total bank deposit at `13.4 lakh crore is more than double the demand for total bank credit of`6.1lakh. That means Indian banks have a huge volume of excess liquidity of about `7 lakh crore. It is parked every day to the RBI at reverse repo rates. There has been a huge saving investment gap in the economy which has been hampering economic revival.

Foreign direct investment (FDI)

The ‘gross inflows of gross investment’ in the RBI account is the same as total inflow of FDI in the economy. It includes 1) direct investment to India and 2) repatriation or disinvestment. By analysing RBI data, R Nagraj, Visiting Professor, Centre for Development Studies, Trivandrum has shown (Hindu, 2 June) that direct investment in India has declined by 2.4%. Hence an increase of 47% in repatriation or disinvestment accounts for the rise in the gross inflow of foreign liquidity. So there has been a wide gap between gross FDI inflows and direct investment in India. Nagraj points out, “FDI inflow increasingly consists of private equity funds, which are usually disinvested after 3-5 years to book profit (per its business model). In principle, private equity funds do not make long term green field investments.” So there had been an unprecedented surge of foreign capital inflow. The Foreign Institutional Investment (FIIs) shot up to $38 billion in 2020-21. Nagraj considers that the flood of FIIs has boosted stock prices and financial returns but did little to augment fixed investment and output.

Conclusion

There are some indicators in the economy which can be explained as indicators to economic revival but actually revival has to be time taking. It is not possible unless there is an increase in employment generation and high level GFCF.