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May 7, 2024

India’s Economic Growth Hindered by Excess Capacity and Low Domestic Demand

India’s Economic Growth Hindered by Excess Capacity and Low Domestic Demand

India’s economic growth, as per the International Monetary Fund (IMF), has been largely attributed to robust public investment buoyed by resilient domestic demand. The Organisation for Economic Co-operation and Development (OECD) echoes this sentiment, expecting that strong public investment will continue to drive India’s economic expansion. However, a critical challenge remains: the hindrance posed by excess capacity and low domestic demand on private investments.

The IMF and OECD reports emphasize that while public investment remains strong, the driving force behind domestic demand is predominantly gross capital formation, particularly in the public sector. This scenario has left private consumption growth sluggish, impeding overall economic momentum.

Moreover, economists are pushing out the Reserve Bank of India’s (RBI) interest rate cut forecasts to the end of the year, signaling concerns about the current economic landscape. The sluggish private consumption growth and reliance on public investment underscore a broader issue within the Indian economy.

Government capital expenditure, both at the Centre and in the States, has seen a steady rise in recent years, totaling over Rs 10 trillion since 2021-22. While this increased spending has supported economic activity to an extent, it also highlights the imbalance in the economy. Excess capacity and low private investment remain significant obstacles.

Excess capacity refers to a situation where industries produce below their maximum potential output due to weak demand or inefficient utilization of resources. This condition is prevalent across various sectors in India, from manufacturing to infrastructure. Without adequate demand, businesses are reluctant to invest in expanding capacity or initiating new projects, further exacerbating the issue.

Low domestic demand, on the other hand, poses a challenge to private investments. Despite efforts to boost consumption through various policy measures, such as tax cuts and stimulus packages, private spending remains subdued. Factors contributing to this include subdued consumer confidence, job uncertainties, and high household debt levels.

The COVID-19 pandemic has amplified these challenges, causing disruptions in supply chains, reducing consumer spending, and dampening investor sentiment. While the government has rolled out relief measures and initiated reforms to revive the economy, the recovery has been uneven, with certain sectors faring better than others.

To address these issues, policymakers need to adopt a multi-pronged approach. Firstly, there should be a focus on increasing private sector participation through incentives, reforms, and infrastructure development. Encouraging private investment will not only create jobs but also spur economic growth in the long term.

Additionally, efforts to stimulate domestic demand must continue, with targeted interventions aimed at boosting consumer confidence and purchasing power. This could involve measures such as income support schemes, investment in social infrastructure, and job creation programs.

Furthermore, addressing excess capacity requires structural reforms to improve the ease of doing business, streamline regulatory processes, and enhance competitiveness. Investing in research and development, promoting innovation, and facilitating technology adoption can also help industries modernize and adapt to changing market dynamics.

In conclusion, while India’s economic growth is currently supported by robust public investment, the challenges of excess capacity and low domestic demand continue to hinder private investments. Addressing these challenges requires concerted efforts from policymakers, businesses, and other stakeholders to create a more conducive environment for sustainable economic growth.

Jhumpa Lahiri

Jhumpa Lahiri

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