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MOSL: Fuel or Engines (Economy)-Exacerbating the current economic imbalances

Fuel or Engines (Economy): Exacerbating the current economic imbalances; Domestic policies geared to boost consumption and reduce savings

 

During the past many years, while consumption was the key driver of India’s GDP growth, the role of investments declined. The former, worryingly, is not supported by commensurate growth in household income, and thus, India’s gross domestic savings (GDS) have declined, along with rising leverage. The economic prescription, thus, is to take various policy measures to incentivize savings and discourage consumption. Higher savings may first lead to a reduction in current account deficit (CAD), and then create sufficient space for investments to grow much faster. A number of recent domestic policies, however, are in exact opposite to the prescription. Four major domestic policies are worth discussion, these include (a) announcement of direct income support to farmers by various state governments, following the central government; (b) strengthening of social security benefits of poor people by increasing pension, introducing (or increasing) unemployment allowances, and providing free health insurance, etc.; (c) limiting the depreciation of the INR against the USD by accumulating foreign exchange reserves; and (d) lowering interest rates. All these policies – intentionally or unintentionally – exacerbate the current imbalances by encouraging consumption, and thus, reduce household savings. Revival of investments, in such a scenario, could only be supported by foreign savings, which would be highly unsustainable.