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Tuesday, July 27, 2021

Explained Ideas: How can India boost the overall demand in the economy?

One option is to turn to those at the bottom of the pyramid who have a high marginal propensity to consume, write Radhicka Kapoor and Nooman Majid.

By: Explained Desk | New Delhi |
Updated: August 8, 2020 7:54:06 pm
Women wearing masks walk beside a line of trucks. The trade of goods has taken a hit due to Covid-19. (File Photo)

India is facing a structural demand problem, one that predates the COVID-19 shock. This challenge has been exacerbated over the past few months as jobs have been lost and incomes have collapsed.

Boosting demand, in particular domestic demand, is critical for an economic revival as external demand is likely to remain muted.

Rathin Roy of the National Institute of Public Finance and Policy has argued that India’s growth story has been driven by demand generated by those who are at the top of India’s socio-economic pyramid, but that has now plateaued.

The question that arises is: Where is demand going to come from now?

Radhicka Kapoor (senior fellow at ICRIER) and Nomaan Majid (a Senior Employment Specialist ILO DWT for South Asia) tackle this question in their opinion piece in The Indian Express.

“One option is to turn to those at the bottom of the pyramid who have a high marginal propensity to consume,” they write. However, realising the untapped demand potential of this group requires enhancing their incomes and earnings.

How do we increase earnings of those at the bottom of the pyramid?

One way is by devising strategies that enhance productivity growth in the informal economy. In fact, structural change that allows for productivity increase in the informal sector increases the incomes of low-wage workers.

Another way of achieving this is by raising the minimum wages of the worst-off workers.

At present, India has a complex set of minimum wages which offer different wages by occupation type and skill levels for certain industries or sectors notified under the Minimum Wage Act. The Code on Wages (2019) seeks to universalise minimum wages and extend them to the unorganised sector. While this is a laudable objective, it is fraught with enforcement challenges in a labour market that is dominated by informal work arrangements and self-employment.

An effective intervention in this context would be to ensure a decent minimum wage for those who are the bottom of the distribution — the casual labour. This, in turn, will help set a higher wage floor for others engaged in low-paid work, including regular informal workers, thereby enhancing their earnings.

Concomitantly, it is important that minimum wages are paid in public workfare programmes too, in particular MGNREGA works, which involve the employment of unskilled labour.

The minimum wage can be linked to the consumption expenditure of the relatively better-off group of workers, that is, the regular formal workers in some manner, say the median consumption of the bottom 25 per cent. This would create not just a dynamic linkage with the consumption of the better-off workers, but will also allow for the updating of the minimum wage every year.

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