Health, infra and fiscal stimulus will act as our economic panacea

Undoubtedly, the most challenging disruption of the recent past, the covid pandemic and subsequent restrictions, led to never-before economic turmoil of unprecedented proportions, sending most business plans and strategies into near chaos. The worst, we hope, is over. While ending the pandemic is everyone’s first priority and a sure way for India to improve its economy, the right public policies and a zealous private intent are also key to future growth.

The health crisis presented an opportunity for individuals and businesses to pause, reflect and realign their lifestyle, priorities and perspectives. Rapidly changing consumer behaviour, business imperatives—both short- and long-term—and a renewed zeal to shed ghosts of the past have only helped accelerate the transformation.

Indicators of my optimism are already evident. Over 800 million covid vaccine doses have been administered. Active cases are coming down. Deaths are fewer. Restrictions are being lifted across the nation. The country’s workforce is returning to work. A good monsoon amid the kharif sowing season has brought on some cheer in rural India as well. And, pent-up consumer demand is unleashing itself slowly but surely.

Agriculture, forestry and fishing are already on the path of positive growth. India produced a bumper crop in the last kharif and rabi seasons, despite pandemic blues. Financial and professional services were less adversely affected and are well on their way to recovery. The information technology sector has breached many ceilings, posting stupendous growth from work-from-home routines. Construction is showing signs of a rebound. Electricity, gas, water and public-utility services and public administration, defence and other services are getting back to normalcy sooner than other sectors.

The global economy is witnessing its strongest growth in 80 years. Near-term concerns about the Delta variant notwithstanding, global growth is expected to remain much above trend for the next couple of years, aided by increased vaccinations. This augurs very well for India’s external sector, given the strong elasticity we have between global growth and exports. Unsurprisingly, manufacturing exports are already 20% above pre-pandemic levels.

In any recessionary situation—as the country was hurtling towards last year—money needs to be directly pumped into the system, primarily to boost immediate consumption. Accelerating economic activities by investing public capital enhances the purchasing power of people. That money is then spent on consumption, which boosts demand and enhances production, which creates even more purchasing power in the economy. This cycle goes into an upward spiral and takes the economy out of recession. That is how the investment multiplier works in any economy. Signs of this in India have been heartening. To revive activities in specific sectors with multiplier effects on growth, the Reserve Bank of India (RBI) introduced on-tap targeted long-term repo operations (TLTRO) with tenures of up to three years for a total amount of up to ₹1 trillion at a floating rate linked to its policy repo rate. The liquidity availed under TLTROs can also be used to extend bank loans to growth-oriented sectors. This was done to ensure smooth bank credit operations. On feedback from market participants, the central bank also decided to increase its special open market operations to ₹20,000 crore.

In addition, as recently as late June this year, India’s finance ministry further announced an economic package of ₹628,993 crore covering three broad areas—pandemic relief, strengthening public health, and growth and employment. While eight of the 17 schemes announced are aimed at providing economic relief to both people and businesses affected by covid, the ministry also has a special focus on health, travel and tourism.

Increasing credit supply has facilitated an endemic economic revival. The idea is simple but effective. The availability of low-cost loanable funds increases credit offtake to be utilized in new economic activities, which results in heightened revival and growth.

Additionally, the government’s initiative of ‘One Nation, One Ration Card’ can go a long way to revive flagging consumer demand and ensure food security for a majority of the population. After the migrant workers’ crisis during the 2020 lockdown, the focus shifted to reverse migration. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme has already been used by almost 100 million people, its highest-ever utilization since its launch in 2006. Expansion of MGNREGA to urban area is also necessary to help stabilize the economy.

Infrastructure is crucial to an economic revival. Efforts to attract manufacturers to India from China must be augmented with concomitant improvements in domestic infrastructure. Not only will it have a positive influence on future exports, it will also create immediate employment and purchasing power, infusing the system with demand. The recent launch of a ₹100 trillion integrated infrastructure scheme should help make India’s economy more competitive. This Gati Shakti initiative aims at breaking the silos between road, rail, air and waterways to reduce travel time, which is expected to improve industrial productivity and raise global competitiveness and generate employment. This is a way to reduce companies’ logistics costs, which presently account for about 13% of their expenses. Strengthening and augmenting health infrastructure, urban planning, roads, rural infrastructure and digital infrastructure are going to be key drivers of economic growth in the long run.

This will call for sustained public investment, which will eventually boost exports. The government has clearly embarked on such a strategy, with central capital expenditure growing robustly. Both the Centre and states have budgeted 30% growth in capital expenditure for 2021-22, and pulling this off will play a significant role in an economic revival.

Physical and social infrastructure spending can simultaneously create jobs, attract private investment and improve the economy’s competitiveness. In the near term, stepping up the pace of vaccination is the most effective stimulus. But boosting growth and jobs in a post-pandemic world is equally crucial. Reforming the financial system with strong resolution mechanisms under the Insolvency and Bankruptcy Code to enable the creative destruction of haemorrhaging companies is a viable way forward.

Last but not least, cultivating an open trade environment conducive to export-led, job-creating growth can provide long-lasting succour for the Indian economy.

Manisha Girotra is India chief executive officer, Moelis & Company, a US-based global Investment Bank