Opinion | It’s time for India to re-examine its economic policy framework3 min read . Updated: 02 Jul 2020, 09:09 PM IST
Let’s not overdo the easing of supply constraints at the cost of policies needed for a demand revival
Preliminary data on some economic variables is now available for this fiscal year’s first quarter, which ended on 30 June. Numbers on automobile sales and core sector growth suggest a rather modest recovery in June, compared to the previous two months, but still show a sharp contraction in economic activity over last year. Given that India’s economy has been on a downward slide for at least two years now, it would be premature to view the sequential improvement in June as a sign of economic recovery.
The covid-19 pandemic has accelerated the downward slide of the Indian economy, as it did for other countries. However, our economic crisis is more a result of the overall framework of India’s economic policy than just the shock caused by the unprepared lockdown. Efforts to revive the economy that started last August have failed to stimulate investment or consumption demand. Part of the reason for the failure of the pre-covid economic package was the flawed understanding of why the economy was in crisis.
Most of the interventions, including tax sops, steps to ease credit availability and monetary policy rate reductions, have been aimed at supply. This despite the fact that it was a decline in aggregate demand that caused the economy to slow. The first big blow to demand came through demonetization. Since then, the situation has worsened, with a decline in real wages, a rise in unemployment and a decline in consumption. This, however, has been largely ignored. The excessive focus on supply-side interventions has hardly helped an economic revival, but instead worsened the government’s fiscal health. The same remedies are being tried again now, when it is the drying up of demand due to a poorly planned lockdown that is aggravating our economic crisis. The various packages announced since the lockdown, including a “ ₹20-trillion stimulus", have largely focused on the supply side. Some efforts to boost demand through steps such as free rations and paltry income transfers have, no doubt, been taken. But these are insufficient, given the magnitude of demand compression in the country.
The trouble lies in our policy framework, which seems to focus too much on easing supply-side constraints. In reality, what our economic numbers show is a lack of appetite for investment as well as a decline in consumption caused by a fall in incomes. It is this gap between economic reality and the government’s policy response that has worsened most of the economy’s structural variables. Despite all the supply-side reforms initiated over the last three decades, India has faced recurring agrarian crises and widening inequality, as well as unemployment and stagnancy in the manufacturing sector’s share of national output. A policy obsession with fiscal deficit reduction and a reliance on monetary easing has constrained expenditure on health, education and food security as a proportion of national income. On the other hand, efforts to correct the imbalance through measures such as an expansion of the public distribution system and the Mahatma Gandhi National Rural Employment Guarantee scheme have been vilified as drags on the economy, with these sought to be undermined by successive governments, including the one that enacted it. But the truth is that these are not only proving to be a bulwark against hunger and mass deprivation today, but had also helped India tide over the financial crisis of 2008-09.
We are currently in the midst of an even bigger economic crisis. Since the existing policy framework has been found inefficient in dealing with the vulnerabilities and structural weaknesses of the economy over the past two decades, its continued use is unlikely to be helpful even now. But this should afford us a chance to reboot India’s economy. Many of the previous crises have been used by policymakers to do so, such as the food crisis of the 1960s that led to self-reliance in agriculture, and the fiscal crisis of the late 1980s that led to the economic reforms of the 1990s. But moves of the past have only a limited shelf life in an economy whose structure and dynamics are evolving rapidly. The present crisis, therefore, provides an opportunity to the government to overhaul its policy framework. A new one should be designed to keep the people of this country at its centre. It will require large fiscal outlays to revive domestic demand and turn it into our main engine of growth. Such an expenditure push is not only the best way to deal with this crisis, it is also necessary for India to sustain high economic growth in the future.
Himanshu is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi