A fresh stimulus should target the worst-hit sectors2 min read . Updated: 01 Oct 2020, 10:08 PM IST
Finance minister Nirmala Sitharaman has hinted at another fiscal intervention to help economic recovery. With covid cases still rising, revival appears to be patchy. Mint explores what shape a second round of stimulus could look like
Finance minister Nirmala Sitharaman has hinted at another fiscal intervention to help economic recovery. With covid cases still rising, revival appears to be patchy. Mint explores what shape a second round of stimulus could look like.
What is our present economic situation?
Economies across the world seem to be reverting back to pre-covid levels. Most parts of the world have seen a swift V-shaped recovery since they allowed activity to resume. However, several regions across the world continue to experience a lower-than-before level of activity, indicating that a complete recovery may not be as swift as expected. The recent manufacturing purchasing managers’ index was 56.8% in September. This is the highest in eight-and-a-half years, indicating that economic activity is recovering. We are experiencing a steady normalization of economic activity at a gradual pace.
What about the earlier policy intervention?
The slow pace of normalization of economic activity could partly be attributed to the prolonged period of a stringent lockdown imposed to contain the spread of coronavirus and the inherent vulnerabilities of the domestic economy. Economic activity in the country had barely started to recover from a growth recession when the covid-19 pandemic hit the global economy. The previous policy intervention was critical as it was a rescue and relief package that prevented firms from going bust and tried to support businesses through the extension of credit, macro-prudential norms, and regulatory forbearance.
How are the localized curbs on activity playing out?
Even as the Centre has started relaxing restrictions and is focusing on allowing resumption of economic activity, several state governments continue to impose lockdowns thus curbing economic activity. These can delay economic recovery. A stimulus combined with complete opening up of the economy is critical for restoring economic activity.
Do we have a case for another intervention?
The Index of Industrial Production for eight core sectors contracted by 37.9% in April, 21.4% in May, 12.9% in June, 8% in July, and 8.5% in August. Thus, the recovery seems to have somehow lost its steam because of the lockdowns imposed by the states and covid-led uncertainty. Therefore, another round of stimulus, now that a bulk of economic activity is permitted across states, could accelerate economic recovery. The intervention should ideally be fiscal as the key is to revive aggregate demand in the economy.
What should be the form of stimulus?
Nominal wage cuts and job losses could result in reduced demand. Add to this the concern about future safety of income, which has resulted in an increase in savings. Thus, a fiscal intervention must be geared towards reviving demand in sectors that have been worst hit by the pandemic. A Keynesian stimulus in the form of higher government spending, greater transfers to local bodies to facilitate higher capex spending, and conditional tax cuts could be an optimal combination.
Karan Bhasin is a policy researcher.