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Photo: Mint

Opinion | Arrest the slump before it slips beyond control

Demand and supply may follow jagged patterns this year but both are expected to decline on an aggregate basis. India needs stimulus spending to take effect without further ado

With the country under a lockdown for more than 40 days, a crash in economic activity during the period was a given, but hopes of a quick rebound after opening up have been revealed to be more wishful than realistic. Signs abound of a slump in demand that could outlast the curbs imposed. Consider India’s Purchasing Managers’ Index reading for the manufacturing sector. From 51.8 in March, when it was barely in expansion territory (above 50), it slipped to 27.4 in April, a level that points to a sharp contraction. A McKinsey survey of Indian consumer sentiment, conducted during the lockdown, showed that 54% of respondents had suffered a loss of income and 67% had reduced spending. While the worst phase in terms of output clamps may be behind us, uncertainty still reigns over future earnings. It is safe to assume that households will be all the more careful with their money now. The sight of liquor stores being swarmed on Monday should not spawn heady forecasts of pent-up demand spurring a post-lockdown revival. There will certainly be bursts of buying; also, periodic gluts of supply as some services and factories get active. In many markets, we should expect demand and supply to follow jagged patterns. All added up, however, both these variables are likely to fall short of last year’s levels—declines that the government must act promptly against.

The belief that the lockdown only postponed demand is misplaced. Economic conditions in India were tough even before the menace of covid-19 showed up. The shock that has been suffered since then has worsened various weaknesses. Credit availability was constrained, for example, because of a pile-up of bad debt in the financial sector. Sales were in slowdown mode in several sectors. Legions of small businesses were struggling. Today, the misery stands magnified. Covid’s early impact has been harsh enough. Millions of people have already lost their jobs or seen their incomes shrink. Enterprises of all description and size have had their finances squeezed. The weaker ones are gasping for survival. As more and more ventures go out of business, leaving trails of unpaid dues and idle assets, the country’s woes will probably grow. The less secure that people feel, the less willing they will be to spend freely. If the gloom persists, aggregate demand will probably fall further.

Global output is projected to contract this year, with international trade expected to reduce at thrice the rate of that contraction. Clearly, overseas demand for Indian products and services cannot help our economy recover. The only tool that could achieve a revival is a Keynesian-style economic stimulus. Government spending has to take the place of private consumption and investment. If the country’s aim is to keep growth going this fiscal year, then this should be done before demand falls too low. It would also require adequate money; as of now, a package of 10 trillion is considered appropriate. As extra cash begins to go into circulation, supply constraints—apart from curbs, labour shortages are a worry too—will also need to be eased. Otherwise, the country risks price volatility. The question of raising funds for a big-bang fiscal package should not hold us back. Apart from rejigging the Union budget, large volumes of debt could be issued overseas, or loans taken from India’s central bank against shares in public sector enterprises as collateral. At a pinch, we could print some extra money, too. The means exist, but the ends cannot wait.

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