Now that a decline in private consumption is pulling down economic growth, the focus needs to shift to improving wages and other measures to spur demand and savings, which does not seem to be happening now
New Delhi: That the Indian economy is slipping into a recession is quiet apparent. The real GDP growth has gone down from a peak of 8.2% in 2016-17 to 6.8% in 2018-19, with the fourth quarter of 2018-19 dipping to 5.8%. The first quarter of 2019-20 is expected to dip further to 5.6%. Nor for that matter the fall in private consumption, which has gone down since the second quarter of 2018-19. Private consumption has been the main driver of India’s growth, contributing about 60% to GDP, and its fall is dragging economic growth further down.
Since consumption expenditure is directly linked to income, especially for the lower and middle income working population forming the bulk of population of India, the imperative is to improve their wages to spur consumption demand.
Wage growth is also linked to savings and investment. The Economic Survey of 2018-19 gives the example of China, where higher wages drove up savings rate, to argue for well paying jobs in India and an effective minimum wage regime across the country. It notes that gross savings have fallen from 31.1% of GDP in 2015-16 to 30.5% in 2017-18 – entirely contributed by the household sector savings, which declined from 23.6% of GDP in 2011-12 to 17.2% of GDP in 2017-18. With this decline, investment rate has gone down.
Declining wage growth: A structural issue
The SBI’s latest study, Root Cause of the Current Demand Slowdown, says the reasons for the current slowdown are both structural and cyclical, apart from global uncertainties. Among the structural factors, it holds a substantial decline in both urban and rural wage growth as the "most crucial" one.
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