Will green shoots of economic recovery sustain? These stimulus measures needed urgently

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November 17, 2020 7:31 PM

While the manufacturing and services PMI, along with the farm output have shown a positive sign, activities in sectors such as travel, tourism, and hospitality continue to be badly affected.

After a record slide of 23.9% in the June quarter, the year-on-year contraction in real GDP narrowed to 7.5% in the second quarter of this fiscal.

The Indian economy has started to recover from the woes induced by the coronavirus pandemic, however, it is still premature to conclude that the economy has turned the corner. With the increasing caseload in many areas of the country, partial lockdowns are intact, thus affecting the ease of supply and demand. While the manufacturing and services PMI, along with the farm output have shown a positive sign, activities in sectors such as travel, tourism, and hospitality continue to be badly affected, and sectors such as construction and organised retail continue to struggle. Besides, there is a crisis of confidence in the economy as the vaccine for the virus is still to be found, according to a report by Brickwork Ratings.  

While the pandemic has brougt a strong headwind for the Indian economy, it is to be noted that the economy had already been slowing down for several quarters before the pandemic. While the GDP growth had slowed down from 8 per cent in the Q1 FY19 to 3.1 per cent in the Q4 FY20, investment levels during the same period had declined from 30 per cent of the GDP to nearly 26 per cent. Thus, while the full resumption of economic activities may take us back to 2019-20 income levels, accelerating the growth trajectory requires addressing structural problems, said M Govinda Rao, Chief Economic Advisor, Brickwork Ratings. 

Key steps that can boost economic growth

The government will have to initiate measures not only to ensure the resumption of economic activities but also to address structural problems, the rating agency said. Besides the progressive relaxation of restrictions, it suggested that the most important stimulus the government must undertake without any further delay is to clear all the pending bills of contractors. 

Also, stabilising the technology platform is expected go a long way in improving tax compliance, and the timely monitoring of input tax credit claims will likely improve tax compliance. It is estimated that the move could trigger increased revenue productivity, it will be pragmatic to undertake reforms in the tax structure. Further, reducing the tax rates on construction materials such as cement, steel, paints and plywood from the ‘sin’ rate of 28 per cent to a general rate would help revive the labour-intensive construction sector. The same is the case with passenger automobiles. 

Meanwhile, the Dun & Bradstreet Composite Business Optimism Index stood at 46.2 for Q4 2020. The index increased by 57.4 per cent on-quarter. Around 53 per cent of the respondents expected the volume of sales to increase in Q4 2020, compared to 24 per cent in Q3 2020, which is an increase of 29 percentage points.

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