Indian economy under triple crisis? What govt must do to bring it on growth track
Updated: Sep 30, 2020 4:22 PM
COVID-19 pandemic turns into economic crisis rather a health crisis as the world’s best economies experiencing negative GDP growth.
Indian Economy is one of the fastest growing economy in this decade, world’s developed economies looking on us as we provide them best market.
Gulnawaz Usmani and Vaseem Akram
COVID-19 pandemic turns into economic crisis rather a health crisis as the world’s best economies experiencing negative GDP growth. India place at second position in coronavirus cases with more than 4.5 million confirmed cases after the US. The growth of an economy generally measured by growth in GDP. Change in growth we can have measured by percentage change in GDP typically over a year. As per to the OECD (Organisation for Economic Co-operation and Development) the world economy could have face the same growth rate as it was in 2009 due to the outbreak of corona virus (COVID 19).
Gross Domestic Product (GDP) is the market value of all the final goods and services produced in a country during a given period of time. GDP measures the wellbeing of an economy, on the basis of GDP one can easily predict the status of a country. India’s GDP showing alarming downturn of 23.9% which is all time high in the past 40 years. These estimates are of formal sectors only if we add estimates of informal sector the contraction will be more drastic. To arrest the spread of coronavirus almost all the economies were under strict lockdown which influenced almost every sector and hence GDP. It is not just because of the stringent lockdown only but its roots submerge back in 2016 when government announces the demonetization of 500 and 1000 Rs. notes. The story is not ended here the other step of CGST implementation then came into the scene which destroy all the local market demand and supply badly. These two steps are like Arrowhead in the dark. Demonetization and GST have harsh effect on local market especially unorganized market which contributes almost 90 percent to the total employment of our economy.
GST acts as a whammy for the states revenue. After the imposition of GST, states tax revenue has reduced and COVID-19 crisis has further multiplied the state’s financial problems. On account of the ongoing health crisis states government has estimated that there may be a revenue shortfall approximately 30 percent. In 2017, government wooed the states towards the implementation of GST by assuring that the revenue loss would be compensated if the tax revenue collection fell short. Coronavirus pandemic led recession is totally a bolt from the blue.
States which are totally under the fiscal distress, have no option other than to borrow. This will further create a massive situation, because the states are already under high debt and if they will go for more borrowing, then the situation becomes trickier.
Indian Economy is one of the fastest growing economy in this decade, world’s developed economies looking on us as we provide them best market. But GDP downfall takes us somewhere back to 45 years which is totally unpalatable when we are trying to take our economy towards the 5 trillion economy status. Due to the spread of coronavirus, millions of people lose their jobs, which is directly influenced their demand pattern. After the spread of coronavirus and more than 3 months’ stringent lockdown economy is in a precarious situation.
According to McKinsey report, India should grow at 8 percent per annum to provide the employment to its growing population. Indian economy recorded negative growth and have to walk on tightrope, as per to the official data, Indian economy shrank by 23.9 percent in the second quarter of financial year 2020-21 because of the halting of the various economic activities. Consequently, labour sector further shrank.
Only the farm sector is showing some relief with 3.4 percent of growth while all other sector namely construction (-50 percent), Manufacturing (-47 percent), mining and quarrying recorded the highest falls.
The expenditure incurred in the 2nd quarter of 2020: Gross fixed capital formation decreases by -47.1 percent, inventories fell down by 20.8 percent, export went down by 19.8 percent while the public consumption increase by 16.4 percent as the government announces and implement various relief packages during coronavirus pandemic.
Although the revenue and expenditure both shrank but almost all the expenditures are in positive values while on the revenue side we have all negative values. This indicate that India is in a precarious situation. Economy is moving towards the starving situation. Countries like India, which is already home to the largest number of poor people in the world, get into the grip of extreme poverty because of the undefined steps took by the government.
Low economic growth rate ultimately effects the unorganized workers more than any one. Unorganized sector or marginalized workers contributes more than 85 percent of total labor force, consequently major source of income for this huge part of population. This part of population already fought with the demonetization and GST and spread of corona virus act as a catalyst. All the new investment and the undergoing production work will stop due to the low demand and lack of sufficient funds with the investors thus, again unemployment and hunger will increase among unorganized workers.
Time has come when the government has to take some hard decision about the nation welfare by leaving apart their other agendas. At the time when India need a friendly environment with all our neighboring economies we are on the verge of war. Indian economy need more money to make new investment which we can make only by the exports earning because India is not in a position to borrow more as the economy in already under high debt to GDP ratio.
Here at this point of time when India is under the triple crisis: health crisis, economic crisis and war crisis government should take following steps. Firstly; there is a need for some export-led-growth policy. More export more foreign currency means more chances to start various developmental programs, which ultimately increases the domestic demand and standard of living.
Secondly, government should think about the informal sector. Indian economy is based on unorganized sector especially the small business or we can say the MSMEs (Micro, Small and Medium Enterprises). More than 80 percent earnings in India depends on these small enterprises and other allied economic activities, thus government must implement some relief packages for these enterprises which are under the financial crisis due to demonetization and GST and now stringent lockdown 3, 4.
Thirdly, there must be a health care infrastructure review. Government should work on healthcare sector so that in near future we can easily tackle down such health problems.
Gulnawaz Usmani is Professor (Assistant), Poona College of Arts, Science and Commerce, Pune and Vaseem Akram, Professor (Assistant), IIM, Jammu. Views expressed are the authors’ own.