BackIndia’s economy could yet avert an L-shaped curve from here on
We need deficit-financed and well-aimed initiatives that generate multiplier effects and initiate a virtuous cycle of growth
Premiumome economists are confident that India’s economy will recover quickly once we unlock fully, even if the coronavirus continues to infect a “manageable" share of the population. This view underestimates the long-lasting damage that covid-19 has caused to people and businesses. Discouraged entrepreneurs will wait a while before summoning the courage to reopen and hire again. Therefore, it is imperative that the government undertakes urgent, carefully-targeted measures to enable the country to rebound from an unprecedented economic collapse.
Interventions must focus on sectors that employ large numbers and whose multiplier impacts are substantial. Of these, manufacturing is down by about 40%, construction down by roughly 50%, and trade, hotels, etc., are down by 47%, by the first quarter output data for 2020-21. While agriculture has grown marginally, at 3.4%, this sector supports half our population and still needs assistance. Additionally, India’s large informal economy has been hurt badly, but the gross domestic product (GDP) figures do not fully capture the magnitude of this devastation.
Anyone facing the loss of a quarter of one’s income will cut down discretionary spending. Some people will tap into savings to honour financial commitments. Those working on smaller margins may fall into debt traps. They will cut expenditure on even essential items like food. As people curtail expenses, tax revenues will shrink, leaving central and state governments with limited space to undertake welfare programmes and other strategic expenditure.
This can spiral into a vicious cycle, leading to depression. The conventional Keynesian wisdom is for governments to reverse course through significant fiscal interventions. Unfortunately, the central government’s response to the crisis is unconscionable. It has sought to hide behind calling the crisis an “act of God", and terming the contraction an “exogenous shock". It is not. It is the result of grave economic mismanagement.
In pre-covid years, India’s economy was vibrant until it experienced the twin shocks of demonetization and a hasty goods and services tax (GST). The government did not restore the health of banks’ balance sheets, impeding investments and pushing stalled projects to a record high. India’s officially recorded growth rate slumped from 8.3% in 2016-17 to 4.2% in 2019-20. The unplanned lockdown pushed this slowdown into a GDP collapse of -24% in the first quarter of 2020-21.
India had ample time to prepare itself for the virus and ensuing economic challenges. The Modi government, it seems, chose to do neither. Instead, it gave us slogans: a ₹20 trillion package and atmanirbharta (self-reliance). In July, two months after the mega announcement, the consumer confidence survey of the Reserve Bank of India (RBI) reported record despondency. The Centre for Monitoring Indian Economy estimates the loss of 20 million salaried jobs since the lockdown. The central government has displayed reluctance to honour its constitutional commitment to states on compensation for GST-intake shortfalls, crippling them at a time when they are at the frontlines of coping with covid-19.
Yet, India may still be able to avert an L-shaped economic curve, where, after growth collapses, it stays low and stagnant. We must ensure a V curve by pumping in massive resources to save businesses and provide people a minimal financial cushion. Such government expenditure is not a stimulus; it is life support. Simply put, L is for Losers and V is for Victors.
Unfortunately, it appears that the Narendra Modi government set its heart on a J curve, where J stands for jumla (false promise). It seems to have bet that if enough people and businesses fell for its ₹20 lakh crore jumla, their unleashed animal spirits would turn the economy around. People, however, saw through this. So India became the worst performer among the world’s large economies, and tops the global chart of new covid infections.
The government must increase its fiscal deficit instead of exhorting entrepreneurs to dive deeper into debt. Enterprises already burdened by debt will be wary of undertaking new projects. Hence, interest subvention and extended loan moratoriums are crucial to revive private investment.
For construction, the sector with the strongest multiplier impact, the government should fast track and creatively finance its ₹100 trillion infrastructure pipeline. It should revive its realty fund aimed at helping stalled residential projects reach completion, after incorporating lessons from the previous rollout. Healthcare and green infrastructure investments will enhance India’s resilience.
Micro, small and medium enterprises and artisans, especially in the informal sector, will need income-support to stay afloat. Belatedly, the government announced an unemployment support scheme last month. It can emulate the Paycheck Protection Program of the US, under which loans are provided to units on the condition that employees are retained for a period. This can enable the formalization of the informal sector and add large numbers of workers to provident fund rolls.
While agriculture saw positive growth on the back of record rabi procurement, rural India will confront crashing prices and falling exports in the July-September quarter, in addition to a loss of remittances. Before covid-19, a suppressed National Sample Survey report exposed drops in food consumption and worsening malnutrition in rural India. For both the rural and urban poor, an expanded Mahatma Gandhi National Rural Employment Guarantee Scheme, a threshold level of food rations from our substantial stocks, and direct cash transfers must be continued.
RBI’s annual report reiterates that private consumption is the key to an economic recovery. People will spend and jump-start demand if they are back at work and confident of their future. The central government can instil that confidence through careful, deficit-financed and well-aimed initiatives that generate a multiplier effect and initiate a virtuous cycle of growth. Once India is back in business, the resulting growth will generate revenues to repay the deficit.
The need of the hour is a meaningful tranche of government expenditure that puts spending power in people’s hands. Only that will enable our people, businesses and economy to survive, revive and thrive.
M.V. Rajeev Gowda and Akash Satyawali are, respectively, a former member of Parliament and chairman of the All India Congress Committee’s research department, and outreach coordinator at the department.
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