ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Understanding the Structural Dynamics of Aggregate Demand Components and Economic Growth in India

A significant fluctuation in the growth rate of gross domestic product is observed, which comes along with the fluctuations of other demand components from 1951–52 to 2019–20. Applying autoregressive distributed lag to the co-integration model, and incorporating the structural changes in policies since 1991, it is found that in the long run, out of the five components that significantly influence the aggregate demand and hence the economic growth of India, the private final consumption expenditure plays the most significant role followed by private fixed investment—a 1% increase in the PFCE leads to an average 0.96% increase in the GDP. The result also reveals that the structural policy reforms implemented since 1991 have created the virtuous cycle of economic growth in the economy and should be a policy priority.

The Indian economy had been registered as one of the fastest-growing economies in the early decades of the the 21st century and before. However, it confronted problems in the initial phases of the 21st century and its situation got worse in the wake of the 2008 global financial crisis (GFC). At the peak of the surge in 2006, Kohli (2012), a political scientist, warned about the implications of changes which are not so much pro-market (as pledged) as pro-business in actuality, with advantages flowing primarily to powerful corporate organisations. Kohli’s (2012) book, Poverty amid Plenty in the New India, substantiated the argument by demonstrating an uneven dispersal of the rewards of market-oriented changes and prosperity. Bhaduri (2008) made the case that in the name of liberal reforms, big corporations destroyed forests and rural land, obliterating the lives of the poor and disadvantaged in the informal economy and agriculture. He referred to the decade’s economic expansion as “predatory growth.” Before the economy could regain its initial faster pace of growth, the problem continued to persist until recently till it went to precarity after being stricken with the COVID-19 pandemic. Now, it is showing a clearly visible sign of economic slowdown. The Indian economy has declined for six consecutive quarters, with growth falling to 4.5% in the second quarter of 2019–20 (Subramanian and Felman 2019). This negative trend has been mirrored in the reduction of labour force participation and growing unemployment, a decline in rural consumption, a lower rate of capital formation, decline in core sector production, a reduced rate of growth in exports, and advance tax collection registering far below the fiscal year’s target (Singh M 2019; Subramanian and Felman 2019).

The negative functioning of the economy is often linked up with demonetisation, improper enforcement of the goods and services tax (GST), the banking and non-banking sector financial crisis, the reduction in aggregate demand, and agrarian hardship. According to Subramanian and Felman (2019), the two main forces of the Indian economy—export and investment—have decelerated due to the stagnation of world trade and the two waves of balance sheet crisis, after the GFC. However, in exploring the factors that have caused the slowdown of the Indian economy, two debates exist. The first argument centres on the structuralists’ viewpoint, which assigns the problem to restrictions on labour and land, governance, and income disparity. The other group is that of cyclicalists which focuses on recent occurrences of the downturn to a drop in aggregate demand caused by agricultural hardship, demonetisation and GST implementation, government policies, and political uncertainties.

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Updated On : 20th Feb, 2023
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