India started to see the consequences of the pandemic, with the release of the latest review by the Department of Economic affairs, Ministry of Finance. The sharp contraction of 23.9 per cent in the Gross Domestic Product (GDP) growth rate in the April-June quarter is the highest since independence. The blame put on “Act of God” is only partially acceptable, as the growth rate started to plunge even before India could see the face of pandemic. With many hurdles to pass ahead, the Ministry of Finance started to take measures to absorb the shock as much as possible.
Lessons from Past
Do you remember the Great Depression in 1929, which was the worst economic downturn in the history of the industrialised world. Though many reasons were put forth to explain the cause of depression, one of the main reasons was low consumer demand and stockpiling of inventory. In the `early 1900s, industrialisation innovated itself with many disruptive technologies. Manufacturers of Washing machines, televisions, automobiles et al boomed their productions to cater them all over the world. The missing piece in this picture was, increment of labour wages.The elite club purchased these durables(which can last for many years) in the initial years of production and those being durable in nature, could function for more than 10 years. The masses all over the world couldn’t afford these products as the manufacturers did not pass down the dividends received to the labour class. The companies kept manufacturing these products, with no consumers left as the elites did not see the need to replace the durables already bought. With myopic planning in place, the stockpile in the inventories increased along with decrease in the consumer demand. Companies ran into losses, which ultimately led to unemployment and a crash in the stock market.
Present scenario in India
Though not the same exact scenes are being repeated in India, a pattern can be observed from the 1929 great depression. We can compare the rural economy to the labour class during the 1920’s. In India, the rural economy is neglected. The overall consumer demand is in downfall right now and even though the government is injecting crores of rupees in different sectors, without consumer demand, growth rate of economic activity cannot be pulled up the trajectory.In fact, more money in circulation without consumer demand can lead to cost push inflation. With very low wages to labourers, less margin of profits left with farmers and lack of proper infrastructure in the countryside, the disposable income in rural areas is very minimal. This low disposable income cannot revive the consumer demand. Though people from urban areas have better disposable income than people in rural areas, durables are not replaced in a short time to revive consumer demand. Notably, the money in pockets of people in rural areas, can increase the demand for these durables. The new market for the products of manufacturers and companies should be the rural areas.
Back to the Past
What did USA do to get out of the Great Depression? Then newly elected president Franklin D. Roosevelt came up with a program called “The New Deal: A Road to Recovery”. This program concentrated spending on social expenditure like building dams, Hydro electric projects, rural infrastructure et al by employing the unemployed. This created both capital assets as well as permanent employment to masses. A striking feature here was the number of employed women in the United States rose 24 percent from 10.5 million to 13 million. In 1935, Congress passed the Social Security Act, which for the first time provided Americans with pensions for old age, unemployment and disability. Slowly, the economic activity started to revive and the inventories cleared up. For the next few years, the GDP grew at 9% and eventually the Great Depression ended by USA lending a helping hand to other countries in need.
Lessons learnt to be applied
India can repeat the New Deal program, with changes made to contemporary times. Finance ministry can start investing on social expenditure. MGNREGA(a scheme to provide mandatory 100 days of employment in a year to the poor) already proved to be successful in creating capital assets and generating employment to the rural poor. India has a long way to reach the threshold in investing in rural areas. Building roads connecting hinterlands to enhance rural trade, constructing cold storages for farmers to park their perishable harvests till they get a good market rate, food processing units to encourage horticulture and exports, public private partnerships in agriculture, technological interference in agricultural allied activities like artificial insemination in cows for increasing milk production and providing electricity by building solar parks in rural areas can create enough capital assets which has long term positive results and generate permanent employment. This can get the consumer demand on track, complemented with Government’s injection of money into other sectors, can also lead to the dream of a $5 trillion economy, though late than never.
When the share of rural economic activities, agriculture in particular, to GDP shrank year on year basis, it is not because of its ineptness, but the value addition was neglected. Even during pandemic times, when all the sectors took severe beating contracting GDP to 23.9%, the solitary exception to this was agriculture which grew 3.4%. It is high time the Government of India realizes the capacity of the rural economy and do not forget a friend (farmer) who helped us in need.