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Home / Opinion / Views /  The Centre should work on stimulating demand

The Centre should work on stimulating demand

India’s economic recovery remains fragile and the government has sufficient fiscal space to impart a belated stimulus. Let’s lift the lid on spending and set income multipliers in motion Photo: AFP

India’s economic recovery remains fragile and the government has sufficient fiscal space to impart a belated stimulus. Let’s lift the lid on spending and set income multipliers in motion

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A statistical recovery from the damage done to India’s economy by the covid pandemic seems close. Gross domestic product (GDP) data released by the Centre on Tuesday showed that our economic output in the second quarter of 2021-22 had just about surpassed its absolute level—at constant prices—in the same period of 2019-20, having grown 8.4% over last year’s figure. While first-half GDP this fiscal year was still below its pre-pandemic total, our current momentum could yet see the economy end 2021-22 on the whole with a growth rate slightly higher than what’s needed to make up for last fiscal’s covid contraction of 7.3%. Our sector-wise performance in the three months till 30 September was disappointingly uneven. Farms and factories were up and whirring above their pre-covid marks, but services were yet to make the cut, by and large. Thankfully, overall investment has at long last begun to show signs of animation, which if sustained could haul it out of a painfully prolonged slump. Private consumption, in contrast, has been a major let-down. Though it rose from last year’s crater, it fell short of what it was in the September quarter before covid struck.

A statistical recovery from the damage done to India’s economy by the covid pandemic seems close. Gross domestic product (GDP) data released by the Centre on Tuesday showed that our economic output in the second quarter of 2021-22 had just about surpassed its absolute level—at constant prices—in the same period of 2019-20, having grown 8.4% over last year’s figure. While first-half GDP this fiscal year was still below its pre-pandemic total, our current momentum could yet see the economy end 2021-22 on the whole with a growth rate slightly higher than what’s needed to make up for last fiscal’s covid contraction of 7.3%. Our sector-wise performance in the three months till 30 September was disappointingly uneven. Farms and factories were up and whirring above their pre-covid marks, but services were yet to make the cut, by and large. Thankfully, overall investment has at long last begun to show signs of animation, which if sustained could haul it out of a painfully prolonged slump. Private consumption, in contrast, has been a major let-down. Though it rose from last year’s crater, it fell short of what it was in the September quarter before covid struck.

Thanks to robust tax collections this year, the government is not strapped for money. By official data, its fiscal deficit in the first half of 2021-22 was just 35% of the 15.07 trillion it had projected in its budget for the full year. Its total receipts at 10.99 trillion were bigger than half the sum budgeted for, while its expenditure at 16.26 trillion was less than half the sum earmarked for the year. Not only was its GST mop-up impressive, it also got a windfall from steep levies on rising fuel prices. All counted, the exchequer is in better shape than expected. Should the Centre carry on with this fiscal disposition, barring a big failure on asset sales, it would be able to finish 2021-22 with a smaller fiscal gap than its 6.8% target as a proportion of GDP. This would ease its return to a path of deficit compression, the covid-revised aim for which is to reach less than 4.5% of GDP by 2025-26. While habitual hawks may celebrate early signals of fiscal restraint, a premature squeeze would actually be a policy error.

Thanks to robust tax collections this year, the government is not strapped for money. By official data, its fiscal deficit in the first half of 2021-22 was just 35% of the 15.07 trillion it had projected in its budget for the full year. Its total receipts at 10.99 trillion were bigger than half the sum budgeted for, while its expenditure at 16.26 trillion was less than half the sum earmarked for the year. Not only was its GST mop-up impressive, it also got a windfall from steep levies on rising fuel prices. All counted, the exchequer is in better shape than expected. Should the Centre carry on with this fiscal disposition, barring a big failure on asset sales, it would be able to finish 2021-22 with a smaller fiscal gap than its 6.8% target as a proportion of GDP. This would ease its return to a path of deficit compression, the covid-revised aim for which is to reach less than 4.5% of GDP by 2025-26. While habitual hawks may celebrate early signals of fiscal restraint, a premature squeeze would actually be a policy error.

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With consumer demand still largely listless, economic disparities having worsened and uncertainty in the air, our economy is in need of heavier fiscal support than has been offered so far. India’s response to the covid crisis has mostly been about big supply-side boosters, with credit easing, production incentives, etc, to go with handouts of food and jobs for distress relief. Welfare provisions need to be kept up, of course, given the hardscrabble lives led by large numbers whose livelihoods got scarred, but a fiscal push is also needed for the express purpose of demand generation. Little of this has been done to any noticeable effect. This year, however, still has almost four months to go. We should deploy hefty sums of money to set into motion the income-multiplier effect of capital spending on projects that can serve other productive ends as well. With inflation a flickery risk, we can’t expect monetary policy to grant our ongoing recovery the durability it needs. Our central bank must focus squarely on macro stability as the global economic outlook darkens and the Omicron threat weakens confidence. Let’s not forget that our recovery remains fragile. The extra fiscal space that we have, therefore, should be used to the hilt. A fiscal windback can wait.

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