Focus on jobs & service sector; this will be key to driving demand

October 16, 2020 7:30 AM

Getting all three right will pave the way for growth revival

Three factors will ensure a sustained economic revival: inclusive job growth, robust services-sector rebound, and strong private demand. To some extent, the third will be a consequence of the first two.Three factors will ensure a sustained economic revival: inclusive job growth, robust services-sector rebound, and strong private demand. To some extent, the third will be a consequence of the first two.

By Rumki Majumdar

Economic activity in India has shown some signs of traction after the unlocking The high PMI manufacturing reading (highest in eight years), strong domestic car sales, diesel consumption, revenue collections by the Centre, and production of finished steel indicate that supply-side activities have resumed, aided by the initial pent-up demand.

That said, uncertainty still exists, and sustaining this rebound could be a challenge as periodic reporting of new Covid-19 infections continues to be high. A prolonged pandemic or a second wave of the outbreak (as is seen in several countries recently) will have implications on the intensity of the supply-chain disruptions (due to intermittent regional lockdowns), business transformations, productivity, capacity-building across industries, and financial sector fragility.

Three factors will ensure a sustained economic revival: inclusive job growth, robust services-sector rebound, and strong private demand. To some extent, the third will be a consequence of the first two.

The need of the hour is to first focus on industries that have the potential to recover soon and accommodate more labour. Infrastructure, construction, manufacturing, and retail are industries that can quickly generate employment for low-skilled workers, improve private sector performance, and increase activity amongst MSMEs. The MSME sector may need financial support and reforms such as tax breaks to respond and revive.

This pandemic has impacted the informal sector the most. The MSMEs, which are also the biggest employers of the economy, are under stress, and it has seen low credit growth. This implies workers who lost their jobs over the past six months may not all come back to the jobs they held, especially those who held low and semi-skilled jobs.

The government has already announced a few measures, including interest-free, 50-year loans to the state governments to boost infrastructure spending. Within manufacturing, the government is working towards tapping into the potential of capital goods, chemicals, and electronics industries through measures announced under the Atmanirbhar Bharat Abhiyan. Strategic partnerships with private players and allowing private capital flow into select sectors would be key. A concerted effort by the government (such as the fiscal stimulus and waiving off interest on interest during the moratorium period) and large businesses (clearing dues and promptly renewing contracts) is likely to help SMEs survive the crisis.

The second driver of sustainable growth will services sector recovery. Accounting for 55% of GDP, this sector has lagged relative to manufacturing in the rebound. Since the sector requires social interactions, such as in the hospitality, transport and communication segments (contributing a fifth to the GDP), it may rebound at a more modest pace because of social distancing norms and caution amongst consumers.

A renewed focus on improving the skill base (education) and digitisation may help the segments rationalise costs, improve productivity, and address new markets. An effort towards building Global In-house Centers (GIC) by prioritising the above and adopting agility in doing business could revive the services sector during and after the pandemic.

The third focus should be on reviving private demand. Rural demand has held up well because of a good monsoon and the government’s support to provide employment opportunities in rural areas. On the other hand, urban demand has not yet picked up momentum. The fear of the infection, uncertainties around employment, and financial anxieties are impacting spending intent as consumers increase precautionary savings.

The oncoming festival months may generate enough demand to keep the wheels of the economy turning till the end of the year. However, private demand is unlikely to steam ahead if the pandemic keeps consumer and business sentiments low (as is evident from recent data). Weak demand may translate into slow investment, and the economy may get stuck in a low demand-supply vicious circle. Government-spending has to buttress private demand to put the economy back on a sustainable growth track.

Undoubtedly, demand uncertainties are weighing on the government’s policy decisions as well. The finance minister recently announced a stimulus of Rs 73,000 crore for boosting consumer spending and capital expenditure. These measures are likely to stimulate demand by advancing certain expenses.

The author is Economist, Deloitte India
Views are personal

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