Demand is an economic principle that shows the willingness of any consumer to purchase any particular goods or services in exchange of any specific price amount. Demand represents how much a product is desired by the consumers.
What is the importance of demand in an economy?
• Demand is a key determinant in the economy.
• It is the basis of the production of goods in a firm.
• The supply of the product depends on the quantity demanded.
• Demand alongside supply determines the price of goods and the volume of goods required leading to the ultimate market regulation.
Factors that are driven by demand:
• Pricing decision of products.
• Planning of sales and operations in the firms.
• Formulating the marketing of the products by the company.
• Collaborative function of demand and supply helps the market to regulate.
Hence, analyzing the demand status of the goods and services is crucial within any specified territory. It drives economic growth and expansion.
Which factors affect the demand?
• Change in consumer preferences
• Varied purchasing power
• Flow of credit
• Wage allocation & Income inequality
• Multiple policies and initiatives of the government
• Performance of key industries
What has been the pattern of demand in the Indian economy in the last few years?
The outbreak of the COVID-19 pandemic across almost all the regions in the world has not only challenged the global healthcare sector but also has damaged the economic condition of most of the nations. However, the Indian economy was dealing with an economic downturn long before this crisis hit the country. Now, the emergence of this pandemic and imposed lockdown have made the existing crisis more stressful.
India, one of the exceptional performers of the global economy is the 2nd largest populated country in the world with more than 1.3 billion people and a 42% share of youth in it. The economic growth of the country is largely controlled by domestic consumption. The country has the target to become US$5 trillion economy by 2024-25 but currently, it is growing at its slowest pace.
Why the demand of the Indian economy has been impacted in the last few years?
Declining performances of the key industries, decelerated manufacturing activities, the collapse of reputed NBFCs, series of incidents of bankruptcies caused serious liquidity crunch and many more incidents have been affecting the demand in the economy.
How is COVID along with this pre-pandemic economic slowdown causing a demand downturn?
Pandemics are large-scale outbreaks of infectious disease with a high burden of morbidity and mortality over a wide geographic area and cause. Globalization, with increased global integration and travel, urbanization, and greater exploitation of the natural environment, has led to pandemics spreading quickly. As an outcome, COVID-19 has become the deadliest disease in recent times.
On 24th March’20, 21 day-long nationwide lockdown was announced by the Government of India. The urgent imposition of lockdown was to slowdown the spread of the virus. Limiting the mass gathering, breaking the cycle of transmission by restricting people from stepping outside their homes, etc. were examples of some of the steps taken. With a few norms of relaxations, the lockdown remained effective significantly in the majority parts of the country for more than 2 months afterward. During the lockdown phase, just like many other countries, millions of Indians were confined to their homes. Except for the essential services, all industries and services were closed which acted as major downturns for the economy.
Almost all the sectors were highly affected as domestic demand and exports fell down sharply. Up to 53% of businesses in the country were projected to be significantly affected. Abolition of mass gathering, maintenance of social distancing were the prime agendas of the lockdown and it affected the tourism and hospitality industry drastically.
Jobs of the daily wage earners or the workers from the informal sectors were at high risk. More than 45% of households across the nation have reported an income drop as compared to the previous year. Under complete lockdown, less than a quarter of India’s $2.8 trillion economic movements were functional. The FMCG companies reduced their operations and started focussing on essentials. The task of supplying the essentials to the required destinations was highly questionable in the initial phase of lockdown.
Ceased industrial activities, prohibition of railways, domestic and international flights across the nation caused a drastic drop in power, oil, coal, and steel demand. Lesser manufacturing activities also led to a reduction in export values. Hence, overall disrupted economic activities made the Indian GDP fall by 23.9% in Q1FY21.
India’s economic growth is largely controlled by domestic consumption. Now, these crises affecting the industries are causing income growth slumps among the rural and urban people leading to a lesser propensity to spend. Besides, the lower money supply in the economy, rising uncertainties of the consumers with changed regulation regarding tax, and other economic issues are also some serious reasons behind the falling consumption.
How the situation can be controlled? What has been the initiatives from the government in recent time to tackle this situation?
Private consumption and investment are the two crucial pillars for the growth of the Indian economy. In Q1 2020, private consumption which accounts for 59% of India’s GDP declined by 27%, while investments by private businesses fell by 47%. During this quarter, government spending increased by 16%, but it was not sufficient enough to cover the disruptions suffered by other engines of growth. Except for agriculture, all the major sectors of the economy were badly impacted.
In 2020, multiple economic packages were announced by the Indian government for empowering the poor, labourers, migrants who were adversely affected by COVID-19, broadening the scope of private participation, supporting the healthcare sector, reforming the agriculture market in the country, stabilising the supply chain, encouraging public-private partnership, providing indirect support such as credit guarantees, liquidity infusion and many more.
However, even if the health crisis seems to get managed by mid-2021, the economic recovery will be slow with adverse consequences on output, employment, and financial stability.
In the absence of proper domestic demand, businesses will be unable to absorb fresh investments, which would affect employment and overall economic growth. In the current scenario, it is quite hard to predict when the overall economic activity of the country will return to the pre-pandemic level because of the uncertainty of the health crisis. Though the vaccination process to mitigate the COVID-19 has been started from Jan’21, still, the situation might take some time to get under control.
The need of the hour is a powerful fiscal stimulus by the government to encourage domestic demand and to sustain investment without being over-concerned about the fiscal deficit. After the contraction of 7.5% in Q2’FY21, the Indian economy finally entered into a technical recession. However, the partial recovery from the previous quarter throws some hope to perform better in the coming days. The lifting of strict lockdown from most of the parts of the country in the second half of 2020, the arrival of festive seasons have helped the country to start the recovery process. The spending on non-essential goods which got declined drastically due to rising unemployment and worries about likely job losses in the future has started to recover again. Few indicators (e.g., power consumption, passenger vehicle sales, and e-way bills) are showing signs of revival in India after the government eased lockdown restrictions.
Hopefully, with the proper implementation of government policies, vaccination programme, effortless service from the healthcare sector, growing digitization, recovery of the core sectors and the gradually rising business operations will be able to attract more investments in the coming days and India will achieve desirable growth in the post-pandemic era.