15th August 2019- Daily The Hindu Editorials Notes-Mains Sure Shot

 

 GS-3 Mains Question- In the context of the Indian automobile industry experiencing a crisis of demand, does it point to a larger picture of middle-income trap?

 

Context – a pervasive lack of demand in auto sales.

 

What is middle-income trap?

  • It broadly means a consumption driven economy.
  • As we know India’s growth is mainly consumption based i.e. a large portion of the products manufactured by companies in India is consumed by the domestic market itself and it is on this basis that we are growing. Export is too less.
  • But the thing of concern is that what will happen if the people of the country stop or reduce consumption, if they feel that their income is not growing beyond a certain point. This will lead to an overall slowdown.
  • If we look at the automobile sector, we can already see that the consumption has declined. For example- Domestic sales across all vehicle categories slid 19 percent year-on-year this July and of this passenger vehicles sales fell by 31 percent, steepest in past 19 years.
  • And this is not only limited to the automobile sector. The Fast-Moving Consumer Goods (FMCG) companies like packaged food producing companies like Hindustan Uniliver or Britannia has also reported a decline in consumption, also there is a decline in demand of personal loans and so on.
  • These are not signing of a healthy economy, especially the Indian economy that is mostly consumption driven because if demand declines, companies will produce less, factories will close and there will be growth in unemployment.
  • According to World Bank it is measured in terms of per capita income (PCI) i.e. GDP divided by population. Because if people have more income they generally tend to consume more.

What are the signs of an economy facing middle-income trap?

  • When manufacturing has reduced, companies are not investing, there is no innovation and the income of the people has stagnated at a certain point and there is very little export. All these eventually leading to corruption and crime.
  • The various indexes like the IMF in its World Economic Outlook report has lowered the growth projections of India for 2019 by 20 basis points than it had earlier.
  • The RBI’s July round of its Consumers Confidence Survey reported a decline.

A case study of the automobile sector:

  • As we have seen by the data mentioned above the sales has declined.
  • This is among all consumer segments – urban, semi-urban and rural and personal and institutional.
  • Nine straight months of reduced demand has started showing signs like, showroom closures and layoffs at dealerships, component suppliers and vehicle makers themselves.
  • Federation of Automobile Dealers Association have warned of more jobs being at risk after already two lakh jobs already been shed. The Society of Indian Automobile Manufacturers have already laid off at least 15000 contract workers in last three months.

Probable Causes:

  • The liquidity crunch in the NBFC industry and the resulting less credit availability.
  • Increase in insurance costs.
  • 28% GST charged on cars, motorcycles and scooters.
  • Manufacturers overestimating demand when setting up capacity, especially fossil-fuel run vehicles, and,
  • The rapid adoption of app-based commuting.
  • All these are clear signs of a middle-income trap economy and it has begun showing its negative side.

Is it a matter of major concern?

  • It is matter of great concern because our economy is completely consumption driven and a slow-down in one sector will affect other sectors too.

Way ahead:

  • In the short-tern the government can focus of increasing people’s income, providing employment and doubling farmers income. But these won’t let us move out of this trap permanently. We do not want to be in this trap and limit our growth potential like South Africa and Brazil.
  • For the long-run there is a need of working towards increasing export and looking at other inherent weaknesses.

 

Another Editorial

Note: there is another article on renewable energy sector. Not many points are given but these are the major highlights:

  • The Article says that there is a massive push towards renewable energy generation in India. We have a target of achieving 175 GW of solar and wind energy by 2022.
  • We are already the fifth-largest producer of solar energy in the world; and not only this we are also the sixth largest producer of renewable energy.
  • Our PM also won the Champions of the Earth award last year.
  • These have major benefits like environment protection, generating more employment opportunities etc.
  • However, what we still need to do is to cut the cost of production of renewable energy.
  • There are global technological developments that have significantly reduced the cost of renewable energy generation like new types of photovoltaics and onshore winds.
  • Taking advantage of these lower costs, other developing countries like China and Brazil have performed much better than India in renewable energy generation.
  • According to International Renewable Energy Agency rank, currently these two countries rank first and third respectively in terms of production of renewable energy.
  • India has been unable to tap this reduction in production cost. There is need to spend more on research and development.
  • One of the goals of advancing renewable energy is to limit and finally eliminate the use of fossil fuels. But India’s coal demand rose by nearly 9.1% during the ending of March 2019.
  • Coal still features among the top five imports of India.
  • Coal is the dirtiest duel- carbon emission from coal are almost double the emission from natural gas, and also much higher than those from petroleum. A study by the Centre for Science and Environment, New Delhi, shows that Indian coal-powered thermal plants are considered the most inefficient.
  • The report also suggested that 8 of the top 10 lenders to these coal-based thermal power plants are public sector banks. But renewable energy plants being relatively new and need more financial assistance.
  • So favoring the coal-based thermal power plants is not a good sign. If the coal-based power plants continue to grow, then the efforts in renewable energy won’t help much in environmental protection.
  • So overall the vision to create more space for the Renewable Energy in the energy sector is applaudable but the other factors should be kept in mind to make it more efficient.

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