A prescription for GDP growth: Govt must spend, save economy from slipping again, forget deficit

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Updated: June 24, 2021 8:37 AM

Government must scale up spending, boost consumption, and ignore the rise in fiscal deficit, for now, to revive the economy.

Indian economyEconomists say increased government investment is the need of the hour to regain the growth momentum, after the covid setback. (Image: REUTERS)

Indian economy, which showed sequential GDP growth in January-March, may again go in reverse after being struck by the second wave of the covid-19. With millions once again asked to stay at home and businesses forced to operate in a restricted fashion, supply and demand dwindled once again and economic activity slumped in the first quarter of this fiscal year. Now, the government must scale up spending, boost consumption, and ignore the rise in fiscal deficit, for now, to revive the economy, say economists. India’s GDP is estimated to have contracted (-)7.3% in the previous financial year, a sharp fall from the 4% annual growth recorded in the financial year 2019-20.

Government must scale up investment

Economists say increased government investment is the need of the hour to regain the growth momentum, after the covid setback. “Right now, with the pandemic affecting several families, the power of consumption has come down. With several deaths recorded, families will tend to cut back on discretionary expenditure. Therefore, push from investment by the government is needed,” Madan Sabnavis, Chief Economist, CARE Ratings, told Financial Express Online. He added that till consumption picks up, further fall in the economy needs to be prevented.

The covid crisis is an amalgamation of a humanitarian, financial, and healthcare crisis, according to Rahul Bajoria, Chief India Economist, Barclays. He believes that both supply and demand-side dynamics need to be improved amid such a challenge with priority accorded to completion of vaccination drive. “Faster pace of vaccination is the only silver bullet to kick start a durable economic revival. Post that, the government may consider tax cuts, increased spending on infrastructure creation, rural job programmes to further boost the revival,” Rahul Bajoria said.

Mixed signals from high-frequency indicators

Fresh cases have slipped substantially and many states are now attempting to re-open. The vaccination drive is picking up pace with record inoculations seen earlier this week. ICRA’s Chief Economist, Aditi Nayar expects the sequential momentum to improve over a variety of high-frequency indicators in June-July but cautions about the mixed evidence so far. “On the positive side, the daily average GST e-way bills generated have improved to 1.6 million in June 1-13, 2021 from 1.3 million in May 2021. Petrol and diesel consumption have improved sequentially, but still remained lower than the year-ago level by 3.5% and 7.5%, respectively, during June 1-15, 2021,” she highlighted.

Also Read: Supply eased, now revive demand to spur growth: Govt must step in, RBI may not offer more sops

Meanwhile, Rahul Bajoria believes that high-frequency indicators hint that economic loss will only be a fraction of what was seen last year. “Overall, with the pandemic related restrictions being relaxed in the majority of states in June, we should see some improvement going forward. We are already observing early signs of a recovery gaining traction,” he added.

Weighing down on recovery

After the huge humanitarian and economic toll, the government should now focus on supporting the consumption and livelihoods of the poor by a massive expansion of government current expenditure, according to R Nagaraj, Visiting faculty, Centre for Development Studies. “Such an effort will restore household consumption demand and hence boost output. Once consumption and livelihoods are restored, the government can expand public investment to boost potential output,” he added. However, R Nagaraj is concerned about fuel prices being hiked to improve tax revenue. “Rising taxes on petroleum products will be counterproductive because the government is sucking away money from the hands of people, thus reducing purchasing power in the economy,” he added.

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