Govt needs to make hard choices to keep India’s economy going; these steps may help ease economic woes

June 27, 2020 12:59 PM

A strong push is needed to generate sustainable income amongst consumers to improve purchasing power and build confidence in the future.

economy, closed shops, lockdown, reopening, deloitteAlthough several nations began opening up their economies after infection cases had plateaued, India reopened its economy while cases were rising.

Rumki Majumdar

In a world minus COVID-19, we would have had Olympics at this time of the year, with countries competing to be on top of the scoreboard. The COVID-19 scoreboard that exists now instead is not an aspirational one. India is amongst the top five on that scoreboard today. As the nation reopens in a staggered manner to revive its economy, the number of confirmed cases continues to rise (given the relaxed restrictions). With infection cases crossing 5 lakh, many medical professionals suggest that the peak is a few weeks away. 

Unlocking the economy – Some hard choices 

Although several nations began opening up their economies after infection cases had plateaued, India reopened its economy while cases were rising. According to a study by the Federal Reserve of New York, during the spread of the Spanish flu a hundred years ago, the virus came in three phases and the places that opened up too early experienced a surge in infection rate. The study also revealed that those cities that reopened early had a slower economic recovery because sharper outbreaks suppressed demand and business activities. 

While our knowledge about COVID-19 is limited, we surely know that halting economic activity in India has severely disrupted lives, especially those of the poor, and affected businesses. Given the economic costs associated with the protection-protracted lockdown, keeping the economy suppressed is not an option for the government anymore (despite the rising infection). 

If the pandemic stays for long, how would that affect India’s growth prospects 

With a staggered opening of the country, economic activity will increase immediately — factories and shops will come back to life, and workers will resume work. However, economic activity will not suddenly bounce back to the pre-crisis levels as the pandemic has significantly and simultaneously affected both supply and demand. As the virus is spreading rapidly, consumers will engage in activities requiring social interaction, with caution, and save more to prepare for worse times. Businesses will restrain investment expecting low sales and labour shortages (due to reverse migration), thereby creating a vicious circle of low demand and supply. 

Demand or supply – How can the government ease economic woes? 

The COVID-19 crisis has presented policymakers with a unique problem of managing demand and supply challenges. The fiscal and monetary package of 10.5 percent of GDP announced earlier addressed the short-term and long-term supply-side challenges, primarily through lending programmes. 

But what about the demand side? A significant portion of the population is struggling to meet basic needs as unemployment is rising. This has also resulted in discretionary consumer spending falling off the cliff, as seen from few vehicles registrations and reduced mobility (tracked by Google) associated with retail and recreation. 

India can offer a one-time fund transfer to support the most vulnerable sections and businesses, as has been done by a few economies. However, demand is unlikely to improve at a sustainable pace unless the factors hampering demand are addressed. For instance, the US government made a massive one-off fund transfer to households’ accounts and enhanced unemployment insurance in April. According to the U.S. Bureau of Economic Analysis, the month saw personal income increase, but consumer spending decrease at the fastest pace on record. 

For a resource-starved nation such as India, an unprecedented fiscal expansion would require the government to go beyond its means. This may have implications for the country’s debt and deficit. A few analysts have expressed concerns over India’s outlook, growth, and the added debt that it may have to incur to finance the fiscal expansion. After all, there is no free lunch! 

A strong push is needed to generate sustainable income amongst consumers to improve purchasing power and build confidence in the future. This is where the government can step in and increase capital spending to boost asset creation and productivity. India has to scale up its infrastructure significantly to compete with its global peers. This is the right time to spend on infrastructure because that will quickly generate employment for low-skilled employees, improve private sector performance, and increase activity amongst small and medium enterprises. Studies suggest that cost savings for firms due to infrastructure improvement result in more employment in regions they are located. Therefore, infrastructure investment will partially address the underlying factors that create income and demand. 

Fortunately, the government had already set the ball rolling by announcing one of the largest and ambitious infrastructure projects earlier this year. It is also undertaking many projects planned earlier and reviving a few of the stalled ones. The government just needs to give the desired push by directing more funds to speed up the project implementation process. While doing this, the government may exceed the fiscal deficit target. However, this deficit will generate returns and create opportunities in a much more sustained manner. Additionally, the government has to continue ensuring that the targeted credit programme reaches the right beneficiaries smoothly, and bring changes in tax rules and regulations, to improve the efficiency of the factors of production. 

Caution has its virtues 

As the pandemic prolongs, the government will likely undertake calibrated measures to limit the economic damage by addressing either demand or supply challenges, and assessing the real situation and existing (and limited) resources. However, the next steps will be crucial in determining what the future holds once the crisis is over. Undoubtedly, the fiscal deficit and debt will rise in any case. The government has to implement these measures effectively to ensure that they do not result in fiscal and credit market imbalances, compromising India’s growth and future prospects.

Rumki Majumdar is an Economist at Deloitte India. Views expressed are the author’s personal.  

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