Demand Side Stimulus

Recently, the noted economist and former Niti Aayog Vice-Chairman Arvind Panagariya said that the Indian Economy require stimulus on demand side.

Why Demand Side Stimulus is required for Indian Economy?

Rising import tariffs: The government should be worrying about the general trend of rising import tariffs in India.

Rapid accumulation of inventories: As the economy is continuing to open up, the inventories are accumulating rapidly then that would be a clear sign that there is a demand deficiency problem.

Rising debt-to-GDP ratio: Even with the current level of intervention, India was staring at debt-to-GDP ratio rising from 72% to about 85% at least by the end of the current year.

Chinese Challenge: India is facing a strategic challenge from China because India’s economy is much smaller than China’s.

What is Demand-Side Economics?

According to Keynes’ theories, economic growth is driven by the demandfor (rather than the supply of) goods and services.

Demand-side theory directly counters classical and supply-side economics, which hold that demand is driven by available supply.

In terms of monetary policy, demand-side economics holds that the interest rate largely determines the liquidity preference i.e., how incentivized people are to spend or save money.

During times of economic slowness, demand-side theory favors expanding the money supply, which drives down interest rates.

When it comes to fiscal policy, demand-side economics favors liberal fiscal policies, especially during economic downturns.

The cash transfers along with in-kind foodgrain transfers are demand-side interventions, while the tax deferrals and regulatory forbearance are supply-side interventions.

A demand-side interventionfocuses on reviving demand with the intention of restoring economic activity.