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India’s income has grown at its slowest rate in almost five years, according to the latest data released by the government. In the past financial year – April 2018 to March 2019 – income grew by 6.8%. And in the quarter between January and March 2019, it expanded by just 5.8% – falling behind the rate of China’s growth for the first time in nearly two years. This means India is no longer the world’s fastest-growing economy. The new data make it clear that India is facing an economic slowdown.
Unlike China, India’s growth in income has been driven by domestic consumption over the past 15 years. But data released over the past few months suggest that consumer spending is slowing, despite the continuing growth in incomes. Motorbike and scooter sales are down. Demand for bank loans has slowed and India’s leading maker of fast-moving consumer goods, such as packaged food and drink, has reported slower revenue growth in the past quarter. However, sales of smartphones have continued to increase faster than incomes have been growing. All of these are important indicators for measuring the state of consumer spending.
The government has promised that it would cut income tax to ensure greater purchasing power and some economists believe that the government should also consider cutting business taxes in the next budget, which will be announced in July 2019. These measures should act as a stimulus for the economy.
India’s government has promised to spend US$1.44 trillion to build roads and other infrastructures such as bridges and street lighting, but India’s large budget deficit might restrict the government’s options. Many observers say that this money will have to come from the private sector. Experts say that the widening fiscal deficit will hold back medium-term and long-term growth.
Weak exports have also been a problem when it comes to creating jobs. In response, the government is expected to prioritize policies that will make Indian businesses more competitive.
1. Interpret the value of 0.75Yd in the consumption function and 0.2Y in the import function.
2. From the article above, a) Calculate import expenditure as a percentage of total demand in India in quarter 1 2019.
b) Calculate the equilibrium of national income in India.
c) Calculate the value of consumption at the level of national income equilibrium in India.
3. If the government increases its spending by US$ 120 million,
a) Calculate the size of the multiplier.
b) Calculate the changes in national income.
c) Show the changes in national income by using the injection-withdrawal diagram.
4. Using the information from the article, explain whether the supply-side policy could make Indian businesses more competitive. (6 marks)
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