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Photo: Mint

Opinion | Fiscal spending will have to do the heavy lifting

One expects that the focus on supporting MSMEs will likely be maintained

India’s June-quarter data reaffirmed the stark weakness in economic activities. Barring the August manufacturing PMI print, it seems that after the encouraging uptick in May and June, a majority of the high-frequency indicators have weakened to an extent in subsequent months, primarily reflecting the reimposition of partial and localized lockdowns, suggesting that contraction in growth looks set to prolong.

It is evident that not only investment demand is feeble and the likelihood of export-led recovery faces more uncertainties than usual, the overall macro backdrop has severely been complicated with an unprecedented dent in consumer confidence. Such a dent is leading to major headwinds for private final consumption expenditure, which, with about two-thirds share in overall GDP and usually strong growth momentum, typically provides a strong bedrock for India’s growth. Importantly, while covid has resulted into a free fall in growth prints, one must note that the loss in growth momentum is more deep-rooted as was evidenced by the steadily weakening trend during FY20. Thus, policy support to revive the economy has to be commensurate.

While monetary policy reacted with commendable alacrity with large rate cuts and a heavy dose of unconventional policy support, fiscal spending will have to do the heavy lifting in the coming months in providing cushion to the economy. Given the limited fiscal headroom, the usual outcome is often a major squeeze in government’s capital expenditure to counter-balance the heavy draw of revenue expenditure on the exchequer. However, that typically leads to a negative impact on long-term growth potential. While the large overhang of debt and contingent liabilities incurred during the pandemic are major challenges for the fiscal roadmap, it must be recognized that a credible consolidation plan specifying action points for reduction of debt and deficit levels over the medium term is the key to earn confidence and acceptability, rather than merely hovering around the fiscal deficit target.

Against that backdrop, it is noteworthy that a recent RBI report underscored that targeted public investment funded by monetization of assets in steel, coal, power, land, railways and privatization of major ports by central and state governments under an independent regulator can be a critical step to revive and crowd in private investment. It said apex authorities can be set up for several areas to expedite structural reforms and to improve business sentiment and the environment for investment over time.

Interestingly, several studies have indicated that rural demand remains relatively more resilient, even if it cannot compensate for the sharper loss of momentum in urban areas. While suppressed rural wage growth has been a concern, rural-focused job schemes will likely provide support to rural incomes to an extent.

Also, allowing a shift in terms of trade in favour of agriculture can be another policy initiative worth exploring at present, which can potentially generate positive supply responses in agricultural production. Usually, periods of favourable terms of trade has witnessed strong value addition in agriculture in India. It is possibly time to support and de-bottleneck Indian agriculture by focusing on long-term issues, such as irrigation, storage and marketing, rather than the oft-adopted minimum support price-based incentives, which are typically costly and distortive.

Providing support to MSMEs remains a key focus area. Policy initiatives in this regard had been promising. One expects the focus on supporting MSMEs, especially micro enterprises, will likely be maintained as this segment, while facing major shocks during the lockdown, can potentially play a key role in recovery apart from providing much-needed support to the bottom end of the socio-economic pyramid.

Siddhartha Sanyal is chief economist and head of research at Bandhan Bank. The views expressed here are personal.

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