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08 September, 2020

8 Min Read

Reviving the economy

Reviving the economy

Context:

  • In light of the poor quarterly GDP numbers for Q1 2020-21, the article analyzes the critical macro-economic indicators for the Indian economy and suggests remedial measures.
  • The quarterly GDP growth rate for Q1 2020-21 has recorded a historic low.

Gross Fixed Capital Formation:

  • As per RBI, Gross Capital Formation refers to the ‘aggregate of gross additions to fixed assets plus the change in stocks during the counting period.’
  • Gross fixed capital formation measures the increase in fixed capital.
  • Gross fixed capital formation includes spending on land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is taken away from the total.
  • It is a component of the expenditure method of calculating GDP.

Significance OF Gross Fixed capital formation:

  • Developing countries generally invest heavily in fixed assets to increase aggregate demand and prepare capacities to meet future demands.
  • Gross Fixed Capital Formation (as % of GDP) had been on a constant decline (except in 2018) between 2014 and 2019, falling from 30.1% to 27.4%.

Consumer demand:

  • Consumer demand is the willingness and ability of consumers to purchase a quantity of products or services in a given period of time, or at a given point in time.

Significance of consumer demand:

  • Consumer demand is an important aspect of a market-based economy.
  • Higher consumer demand incentivizes greater industrial production which leads to higher employment opportunities and the consequent economic growth.
  • Consumer demand in urban India as indicated by the domestic car sales has been on a steady decline for nine consecutive months. The decreased demand would lead to a fall in industrial activity.
  • Though the rural demand has been better than urban demand due to a surplus monsoon and a higher disposable income through MGNREGA wages, still the weak Gross fixed capital formation demand in the rural economy is indicative of the decreasing average real rural wage growth.

Index of Eight Core Industries:

  • The Index of Eight Core Industries is a monthly production index.
  • It is released by CSO.
  • The eight core industries are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity.

Significance of IIP:

  • The Eight Core Industries comprise 40.27 percent of the weight of items included in the Index of Industrial Production (IIP). Hence they have an impact on general economic activity as well as other industrial activity.
  • The index of eight core industries is considered as a lead indicator of the economy’s industrial performance.
  • This index is an indicator of the supply side health of the economy.
  • The eight core sectors have witnessed a decline in recent times and have registered a growth of -0.2% in August 2019.
  • The Indian economy faces the dual risk of weakening demand and shrinking supply.
  • Investment sentiments are low.
  • The government’s ability to spend has reduced due to reduced revenues.

Way forward:

  • There needs to be a massive push on infrastructural spending to boost the core sector demand and generate jobs.
  • The eight core sectors need structural reforms to revive their growth.

Source: TH

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