By Dhurjati Mukherjee
The pandemic has triggered a slump in consumer spending, hit private investment and a sharp decline in exports with unimaginable dimensions. Though unparalleled, such an emerging situation could have been better dealt by government planners and economists, and remedial actions taken in allowing economic activities much earlier.
The surging problem of unemployment and consumer prices, the bleakness of an economy wilfully mismanaged, the inspired erosion of social security added to the corona pandemic has aggravated hunger, scarcity, homelessness and dislocation with uncertainties over today and cascading angst tomorrow. In fact, the perils of this deathly epidemic have shaken the lives of the economically weaker sections not to speak of the poor.
Recently, as per the National Statistical Office (NSO), the Indian economy shrank by 23.9 per cent in the first quarter, signalling that the road ahead would be more arduous than projected by most economists. It marks the steepest decline since the NSO started quarterly measurement of GDP in 1966. But the decline has been a record low in the global context with only Peru and Macau having recorded lower GDP growth numbers or the period, Care Ratings stated in a research report.
Meanwhile projections of real GDP had been expected to contract in the current fiscal from IMF’s -4.9 per cent slide to OECD’s worst case estimate -7.3 per cent. Some economists have, however, come out with more depressing forecasts but are taking a more balanced view i.e. it’s believed that the contraction may not exceed 6 to 7 per cent. Now with the current data from NSO, the GDP contraction may reach around 9 per cent.
The last time the Indian economy contracted by over 5 per cent was in 1979 when the country was faced by a severe drought and floods in some regions. In the present scenario, the IMF said the total stimulus package for G20 countries averaged 12.1 per cent of GDP, many times more than Global Financial Crisis (GFC). India also announced a stimulus package which it claimed to be 10 per cent of GDP but independent analysts found it to be around 4 per cent or even less.
Delving into the past, while the country’s exports were on the decline, the developed markets were seen to lowering their demand for goods produced by emerging markets and increasing their share of domestically produced services. With exports floundering, investment growth decelerated, and has contracted in the last three quarters.
Meanwhile though private consumption grew by 7 per cent in the past six years, financed by sharp decline in household savings and large jump in indebtedness, this situation changed since the last quarter of 2019-20. With incomes failing and easy credit coming to an end due to rising bad debt of banks and non-banks, private consumption considerably slowed down in the first two quarters of the current fiscal.
However, in such a critical situation, while private investment slowed down, government spending too has been grossly inadequate. Experts believe that at such a time the government should have been aggressive in spending. At least, there should have been strong investments in the health sector by the Centre. But whatever investments came during the past 4-5 months were those from debt-prone States. Thus, it can safely be said that the quantum of measures falls short of what is needed given the size of the economic shock.
The economy has become increasingly centralised but the spending of the Centre has not kept pace with this centralisation. Had the Centre made available more financial resources to the States for development as also disaster mitigation activities, the situation would have been vastly different? Moreover, the long spells of lockdown could have continued but economic activities should have been allowed much earlier.
Resources have obviously been a constraint for the country. As India’s external debt is quite low, attempts should be made to garner external financing for development of infrastructure and other manufacturing areas. Though differences may occur, India’s labour is sufficiently skilled and relatively low-cost. This advantage has to be explored by most States, some of whom have already made some headway in this direction.
However, the most affected has been small business, whether in manufacturing or services sector. The lack of demand and financial constraints has impeded their earnings to a great extent, thereby affecting those working in such units. Moreover, the Central government showed total apathy towards migrants, who were not only affected by the sudden announcement of lockdown but did not have incomes for a considerable period. All this had a telling effect on a large section of the population.
The recent report of the Department of Economic Affairs observed that a V-shaped recovery is under way. As India emerges from the crisis situation, it would be imperative to reorient the country’s policy matrix towards a calibrated reconstruction of the economy and building resilience. The report also found sectors such as power, steel, auto and capital inflows and exports witnessing recovery while areas that need attention include infrastructure, health care, skilling and start-ups.
One may refer to McKinsey Global Institute’s report last month which rightly predicted that the country would need ‘best of the best’ growth to ensure annual job growth of 1.5 per cent similar to the 2000s and productivity growth of 6.4-7 per cent similar to the 2010s. Stressing the need for reforms, and supporting privatisation, it called for measures to channel more household savings to capital market instruments, reducing the cost of credit by 3.5 percentage points and streamlining finances to generate 1.7 per cent of GDP annually for growth-oriented investments.
Experts believe that both a mid and long term strategy is urgently needed for a transition to a sustainable economy, may be by the middle of 2021-22. The current economic crisis offers a lifetime opportunity to roll out a mid-term strategy along with stimulus packages in core sectors.
Some of these could include: a) More focus on the agricultural sector which has shown good progress so that income livelihood to over 50 per cent of the population is assured; b) Building resilient infrastructure and allocating more resources towards construction of roads, buildings etc. in backward districts as part of a stimulus package; c) concentrating on deforestation and desertification and enhancing soil, wetlands and forests to enhance environmental protection; d) Supporting local and small businesses for development of efficient and green business; and with stimulus and R&D, building new energy architecture based on renewable electricity, battery storage and smart grids as also reforming power distribution. At any cost the future economic situation has to be improved for India to emerge as a global power. For things to change, targeted investment need to be an important component of the revival approach. Once government resources are directed to the right areas, these will inject the much-needed money in the economy at least for sheer revival.