Editorial 1 : A Long Overdue Cut
Context: RBI needs to bring on the rate cut.
Introduction: The second quarter GDP numbers are consistent with a number of economic signals that were largely neglected.
Factors for Slower Growth
- Interest Rate Impact
- Real policy rates persistently higher than unity trigger a slowdown especially as spreads remain high.
- Firms preferred earning treasury income from large cash piles to expanding capacity.
- Export Decline and Limited Domestic Demand Stimulus
- Policy Over-Tightening
- Simultaneous tightening across fiscal, monetary, and macro-prudential policies hindered growth.
- Constrained government spending due to elections.
Policy Lessons from the Slowdown
- The interest elasticity of Indian durable consumption demand is high as many first-time salary earners buy and equip houses.
- Counter-cyclical macroeconomic policy that smoothened external shocks had a large role in the economy’s good post-pandemic performance.
- All macroeconomic policy levers must not be tightened simultaneously.
- There is a view that a slowdown was inevitable because of structural factors.
Cyclic Nature of Slowdown
- Consumption Growth: Private consumption increased from 4% to 6%, while government consumption rebounded to 4.4%.
- Service Sector Performance: Strong service sector growth indicates robust demand.
- Historical Context: Past episodes of high real interest rates causing similar slowdowns like in 2010s.
Recommendations
- Forward-looking inflation targets need to incorporate transient supply shocks, such as food price spikes.
- Public Investment: Catch up on public investment to meet budgetary targets.
- Agricultural Policy: Shift focus from grains to diversified food items to align with changing consumer demand.
- Food Supply Chains: Remove middlemen to improve farmer income and lower consumer prices.
- Banks must pass on rate cuts despite fears of margin compression.
Long-Term Growth Drivers
- Structural Reforms
- Restructure agricultural policies to sustain diversified food demand.
- Facilitate private sector participation in food supply chains.
- Job Creation and Middle-Class Expansion
- Private Investment and Capacity Building
- Encourage firms to reinvest profits in expansion and employment.
- Balance policies to ensure stability and predictability for long-term private sector investment.
Conclusion and Way Forward
Since US policy under Donald Trump is likely to lead to global shocks, counter-cyclical domestic policy is all the more required to facilitate smooth catch-up growth.
Firms need to be induced to invest and employ more.
Editorial 2 : Demography, Not Politics
Context: Why scrutiny of lower fertility rates isn’t the answer to the delimitation crisis.
Introduction: There is a possibility that Census will be carried out next year. The delimitation exercise for Parliamentary seats is likely to be conducted thereafter. For southern states success in reducing the fertility rate must not become a disadvantage. It must be lauded and encouraged.
Issues with Population Growth
- Political Implications: Delimitation and Representation
- A potential reduction in parliamentary representation for states with lower fertility rates raises concerns of equity.
- The freeze on delimitation of parliamentary seats based on population has been extended twice (1976 and 2001).
- Extending the freeze appears to be the most viable short-term solution.
- Economic Implications: Resource Allocation
- Population is a key criterion for allocating central resources to states through the Finance Commission.
- States with higher populations and lower efforts to control fertility rates benefit more.
- Inclusion of a demographic change variable by the 14th and 15th Finance Commissions partially offsets this imbalance.
- Social Implications: Regional Disparities
- Differential population growth rates can strain inter-state relations.
- Accelerating economic growth in lagging states is crucial to addressing disparities.
Population Scenario in India
- Current and Future Trends
- India’s population is expected to peak at about 170 crores around 2070 and decline thereafter.
- India, as a whole, has reached a total fertility rate (TFR) of 2, just below the replacement fertility rate of 2.1 which means that a mother would be replaced by a daughter.
- Nearly two-thirds of the population resides in states that have replacement or lower fertility rate, while about a third reside in states that have higher than replacement-level fertility.
- State Variations in TFR
- Population growth is often measured by the total fertility rate (TFR) which is the number of children a woman would have if she followed the current fertility pattern.
- TFR ranges from 1.5 to 3.0 across states (NFHS-5 data).
Way Forward: Policy Recommendations
- A viable and important initiative would be to accelerate the decline in fertility in the states where it is high through:
- Enhancing women’s empowerment which reduces demand for children.
- Rapidly improving the quality of reproductive health services which empowers couples to meet their family size intentions.
- State Specific Focus: There are now only five states which have a TFR higher than 2.1. Focused attention on these states is called for in reducing fertility rates.
Conclusion
India needs a multi-pronged approach to balance equity and growth, focusing on reducing fertility in high-TFR states while maintaining the achievements of low-TFR states. Effective collaboration between the Centre and states, combined with targeted economic and social reforms, can ensure a more equitable and sustainable strategy for population management.