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Following the announcement of India’s second-quarter gross domestic product (GDP) of -23.9%, multilateral agencies, rating firms, think-tanks and prominent economists predicted a GDP contraction ranging between -8% and -16% in 2020-21. This contraction, whatever be the level, is being experienced by the economy after decades of continuous growth. The steady expansion over the last three decades lifted millions out of abject poverty, but the vulnerability of Indian society to a contraction is manifest.

The contraction is the consequence of the unforeseen, uninvited and untoward fury of nature. Political executives have been active in mitigating risks to lives, livelihoods and the economy. The comparatively greater damage to our economy can be attributed largely to India’s structural uniqueness—political, social and economic. In hindsight, wisdom can be splurged. However, sagacity lies in moving forward with a determination to minimize injury. Protecting potential growth is our big challenge.

However, a variety of structural, systemic and institutional reforms being undertaken by the Narendra Modi government with alacrity and expediency must be recognized. Like the governments of P.V. Narasimha Rao and Atal Bihari Vajpayee, a moment of economic distress has been seized to undertake far-reaching reforms, including some politically-sensitive ones, covering all factors of production to enhance productivity and acquire a competitive edge under the banner of Atmanirbhar Bharat. These reforms will usher in deep and lasting benefits in the medium- to long-term, but more needs to be done in the short-term, notwithstanding visible green shoots of recovery.

The economy has been challenged on all fronts—demand, supply, investment and gross capital formation. What’s worse is that fiscal space is absent. Unlike those of developed economies, India’s government cannot be too generous with fiscal spending.

All cylinders of growth need to fire. The country’s lockdown has been substantially withdrawn, rise in covid infections has significantly reduced but uncertainty over incomes continuous to restrains consumer spending. The amounts directly transferred by the government to the accounts of the poor have added to the banking industry’s deposits. Employment worries in the minds of lower and lower-middle class consumers need to be allayed. Persistently high unemployment could cause social disquiet.

One hurdle to building a competitive edge is the inadequacy and quality of physical infrastructure. In advanced economies, a version of Modern Monetary Theory seems to have been used, without pronouncement, to splurge on massive doses of booster shots. Their approach is that if there is slack in the economy, the size of the fiscal deficit should not matter. Further, if nominal GDP growth is higher than the interest rate payable on government debt, a heavier burden of it cannot cause pain.

The Indian economy’s massive slack is reflected in our large unemployment (and underemployment) as well as underutilized capacities. This should be harnessed to create public assets such as roads, ports, airports, railways, public housing, hospitals and schools.

So long as the new money created is used for productive purposes and flows back into the economy for demand as well as supply enhancement, and for gross capital formation, the probability of increased spending leading to high inflation will be remote. The time is ripe for the Union government to go full- throttle on building infrastructure, even if that requires the creation of new money. In fact, it should offer work to every individual seeking it, and even divert jobs offered under the rural jobs guarantee scheme to big infrastructure projects, rather than using it for small aims like the creation of water bodies.

This could revive almost all sectors of the economy immediately, contain the fear of economic uncertainty and unleash unsatiated demand, in particular for discretionary products and services. It will also save millions of small and medium businesses from bankruptcy.

The fiscal deficit of the US, UK, Canada, Japan and Singapore has scaled up to 15.3%, 18.2%, 12.6%, 11.3% and 13.6% of GDP, respectively. Additional allocations of resources to protect growth in these economies are still on the cards. James Powell, chairman of the US Federal Reserve, has said that growth efforts will not stop and interest rates will not be raised until full employment is reached or average US inflation goes beyond tolerable limits; the concept of the non-accelerating inflation rate of unemployment (NAIRU) has been locked in a closet. The European Commission raised $825 billion for a coronavirus rescue plan without any significant flow of revenues.

Physical infrastructure is deficient in every state, district and city of India. We need to provide employment to everyone and build large infra-projects. This is not to suggest that all caution should be thrown to the winds. The secret of success will rest on speed of execution and minimization of leakages in state resources. The Modi government’s performance has been noteworthy on both counts. Though execution risk is manifest, it is worth taking. An alternative approach may not deliver better results.

G.N. Bajpai is an author and former chairman of the Securities and Exchange Board of India and Life Insurance Corporation of India

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