For the umpteenth time we have a demand problem, addressing the supply won’t help


A total of 15.12 million two-wheelers (motorcycles, scooters and mopeds) were sold in India in 2020-21, the latest fiscal year. This figure is lower than the 15.98 million sold in 2014-15 and slightly higher than the 14.81 million sold in 2013-14.

Of course, a simple explanation for this is that due to the pandemic that ran throughout FY21, people didn’t buy as many two-wheelers as they normally would. made. And that is true to some extent.

Nevertheless, the total number of two-wheelers sold in 2019-20 was 17.42 million, lower than the 17.59 million sold in 2016-17. Obviously, sales of two-wheelers have stagnated over the years.

A two-wheeler is probably the second or third most expensive thing that an individual or family buys in their lifetime, after a house and / or a car. In addition, many more Indians own a two-wheeler than a car. It is therefore an excellent indicator of the purchasing power of Indians at any given time.

That said, a similar trend can be seen even in domestic sales of passenger cars. They were at 1.54 million in 2020-2021. In comparison, car sales reached 2.03 million in 2011-12, almost ten years ago. In 2019-2020, it had fallen to 1.7 million, against an all-time high of 2.22 million in 2018-2019.

There are other indicators that suggest a demand problem. The current RBI Consumer Confidence Index has trended largely downward over the past five years. And things only got worse with Covid. The current Confidence Index level in May 2021 was about half of what it was in May 2019.

It is also reflected in the fact that people currently have more money on hand than they have ever had. In March 2021, the ratio of currency in circulation to GDP stood at 14.5%, the highest in half a century. It was 12% of GDP in 2019-2020. This tells us that people are clinging to money and not looking to spend it. The reasons may vary – fear of another wave of Covid; uncertainty as to whether their incomes will stay at current levels or if they may experience wage cuts or even lose their jobs. In this situation, people try to prepare for the future by keeping money on hand rather than spending.

The point is, India has a major demand problem. The government has been trying to fix it for some time. In September 2019, he reduced the basic corporate tax rate from 30% to 22%. The idea was that lower tax rates would encourage companies to expand their activities. It would create jobs. Jobs would mean income that people would spend and thus fuel economic growth.

The government also offered loan guarantees to encourage banks to lend to industry. Between 2019-2020 and 2020-21, Bank Loans to Average Industry – defined as companies that have invested in plant, machinery or equipment up to Rs 50 crore and turnover of less than Rs 250 crore in rupees – increased by 28.8%. Although it sounds impressive, it was on a small basis. In absolute terms, bank loans to the average industry have increased from Rs 1.06 lakh crore to Rs 1.36 lakh crore. In addition, overall loans to industry only increased by 0.44% in 2020-2021.

In fact, it’s not just a one-year phenomenon. Bank lending to industry over the past five years has only grown by 1.33% per year. This is despite the fact that interest rates have fallen considerably over the past two or three years.

One of the reasons for this is that the capacity utilization of Indian industry has decreased. Data from the Reserve Bank of India tells us that it peaked at 83.2% in March 2011 and has since seen a largely downward trend. It was 76.1% in March 2019, falling to 69.9% in March 2020, even before the negative economic impact of the Covid took hold. It was 66.6% in December 2020.

Basically Indian industry as a whole currently has sufficient capacity and does not need to expand unless demand increases significantly. As economist Nitin Desai put it in a recent column of the Commercial standard: “Investment is derivative demand, and it will not increase until final demand increases.” This is reflected in the investment-to-GDP ratio, which fell from a high of 35.81% in 2007-2008 to a low of 27.09% in 20 years in 2020-21.

The point is, the government and the RBI are trying to increase investment in the economy, which is a long-term solution at best. But the long-term solution will only work if demand increases in the short term. To do that, you have to put more money in people’s hands, or the prices of things have to go down. Take the case of two-wheelers and cars: sales can easily be increased by reducing the rate of GST on them. The multiplier effect would be huge given that everything from steel to rubber to plastic goes into the making of two-wheelers.

The government could also consider easing the income tax rate. While a very small part of the population pays income taxes, remember that it is this part of the household economy that always has decent purchasing power.

In short, India has a demand problem, which cannot be solved by trying to regulate supply.


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