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Critical Topics and Their Significance for the UPSC CSE Examination on January 30, 2025

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How can the Budget arrest growth decline?

For Preliminary Examination:  India's Growth Trajectory

For Mains Examination: GS III - Macro Economy

Context:

The Indian economy is going through a rough patch as was evident from the recently released provisional estimates of its Gross Domestic Product (GDP). The underlying growth rate is lower than what was expected and estimated by the government earlier. 

Read about:

Gross Domestic Product (GDP)

Gross Value added (GVA)

Key takeaways:

• The Indian economy is currently facing challenges, as reflected in the latest provisional GDP estimates. The growth rate has fallen short of earlier government projections. What is striking is that, despite increased capital expenditure in recent budgets, as noted in the last Economic Survey, economic momentum remains sluggish.
• To grasp the government's current predicament, it is useful to take a long-term perspective on India's economic trajectory, particularly focusing on private consumption, which is the key driver of the domestic market.
• The post-liberalization period can be categorized into three phases: 1991-2004, 2004-2011, and 2011-2023. Among these, the 2004-2011 period stands out due to its sustained high growth, accompanied by a reduction in absolute poverty. This phase also witnessed a revival of state-led welfare initiatives through rights-based legislations and new national schemes.
• In contrast, from around 2012 onwards—especially post-2019—economic growth has slowed. The major concerns today revolve around weak private consumption and stagnant private investment.
• This period has also been marked by significant economic disruptions, such as demonetization, the introduction of the Goods and Services Tax (GST), and the COVID-19 pandemic-induced lockdowns. The GDP and private consumption growth patterns over these three phases form an inverted U-shape.

• A distinctive feature of the 2004-2011 growth phase was the shift in consumption patterns. While income and wealth inequality had been rising, this period was unique in that the share of private consumption by the wealthiest 20% declined, while consumption by the remaining 80% grew at a faster pace. This occurred despite income growth favoring the top earners.
• State policies played a crucial role in shaping this consumption pattern. More than the size of fiscal expenditure, its composition proved critical. Those in lower income brackets have a higher propensity to consume than the wealthy. Government spending directed toward the working class had stronger income and employment multiplier effects.
• To illustrate this, consider a scenario where the government allocates ₹100 either to (A) capital-intensive projects like a dam or nuclear plant, or (B) direct transfers such as National Rural Employment Guarantee Act (NREGA) wages or pensions for the elderly.
• If all wages are spent and profits are saved, option B generates a greater economic multiplier effect since the entire ₹100 directly fuels consumption, compared to option A, where only a fraction is paid as wages. Moreover, capital-intensive