Rebooting the economy: India needs a stimulus package of at least 5% of GDP

By: |
April 27, 2020 2:10 AM

To bounce back from the pandemic quickly, India needs a stimulus package of at least 5% of GDP that focuses on broad-based development in laggard eastern states.

The all India relief package of Rs 1.7 lakh crore, announced by the central government earlier, which is about 0.8% of GDP, is too puny to reboot the economy.The all India relief package of Rs 1.7 lakh crore, announced by the central government earlier, which is about 0.8% of GDP, is too puny to reboot the economy.

In the classic Walt Disney Productions, Winnie the Pooh, there is a character by the name of Tigger. One of his most famous and oft-repeated quotes is “Life is not about how fast you run or how high you climb, but how well you bounce”. In the context of today’s economy, which is literally under seize due to the novel coronavirus, it is not about how big your GDP is, or how fast you have been growing; the real challenge is how best, and how quickly, you can bounce back to your normal growth of 7-8% per annum.

The IMF’s projections for GDP growth for this year seem to be either in negative or below 2% for almost all major G-20 countries. Within Brics countries, India may do a little better, but still below 2%. This is under an optimistic scenario, and many experts claim that India may also go into negative GDP growth this year, if it does not reboot the economy properly and in time.

The central government, and the Reserve Bank of India (RBI) are doing the heavy weightlifting, trying to remove all roadblocks so that factories and farms can resume operations, albeit in a regulated manner, ensuring the virus is contained. The focus is largely on the supply side, i.e., how to ease restrictions, and how to increase liquidity in the system for resuming production. My humble assessment is that this may not take us far enough as the real problem is collapse in demand. And, that demand may not pick up easily as the virus is likely to stay with us for quite some time, and we may again have lockdowns as and when the viral infection surges. This will surely limit our travels and shopping for non-essentials. However, there is one demand that can easily revive, and that is food.
The NSSO survey of consumption expenditures for 2011-12 revealed that in an average Indian household, about 45% of the expenditure is on food, and almost 60% of the expenditure of the poor is on food. We do not have information about consumption patterns in 2020, but my guess is that an average Indian will still be spending about 35-40% of their expenditure on food; for the poor, this expenditure would be about 50%. And, herein lies the scope to reboot the economy.

We have seen the problems of migrant labourers during the lockdown. They were literally knocked down. The sudden announcement of nationwide lockdown on the night of March 24 gave them no time to go back to their families. They lost their jobs, their incomes, and having spent whatever little savings they had; they were reduced to an almost beggar-like situation, looking at anyone who can feed them. The governments, despite their best efforts, have not been able to redress their problem of hunger. Even civil society could not fully bridge the gap. There is a breach of trust between the state and the migrant labourers which will come out glaringly once the lockdown is lifted. Most of them are likely to rush back to their families in villages, as if they are freed from jail. And ,it will take quite a long time for them to reconcile and come back to cities, if they do it at all. So, the farms and factories, especially MSMEs, in the relatively developed states of western, southern, and north-western India are likely to face labour shortages for many months, maybe years to come. This will lead to more mechanisation of farms and factories in these states. In Punjab, for example, most of the wheat harvesting is already done by harvest combines, and now, even the planting of paddy will be rapidly mechanised.

But, eastern Uttar Pradesh, Bihar, Jharkhand, West Bengal, and Odisha, from where much of the migrant labour goes to other parts of India, will face a double challenge. In these states, agriculture, with tiny farm holdings, was already saddled with large labour force, engaging almost 45 to 55% of their total labour force. Non-farm income from wages and salaries, through migrant labour, was one important source of their income. This is now severely hit. In all probability, these staes’ overall per capita incomes in rural areas may shrink, at least in the short run, raising issues of swelling poverty, hunger, and malnutrition. In such a situation, how does one reboot the economy and also take care of a worsening situation on the hunger and malnutrition front?

A special investment package, a la USA’s Marshall Plan in 1948, for the eastern belt of India to build better infrastructure, agri-markets and godowns, rural housing and primary health centres, schooling, skilling will go a long way to revive the economy, and augment incomes of returned migrant labourers in these states. Rising incomes will generate more demand for food as well as manufactured products, giving a fillip to growth engines of agriculture as well as the MSME sector. Building better supply chains for food, directly from farm to fork, led by the private sector will not only augment export competitiveness of agriculture but also ensure a higher share of farmers in consumers’ rupee. This broad-based development in the hitherto laggard region of India will lay down the foundation for the long-term, demand-driven growth of industry in India.

The all India relief package of Rs 1.7 lakh crore, announced by the central government earlier, which is about 0.8% of GDP, is too puny to reboot the economy. If India has to bounce back quickly, it needs a much bigger relief-cum-stimulus package, certainly not below 5% of GDP. And, it should focus more on the eastern belt, where the issue is one of survival. Else, I am afraid, all indicators of poverty, hunger, malnutrition, infant mortality, and well-being may suffer. India may get derailed from its course of attaining the Sustainable Development Goals by 2030.

The author is Infosys Chair professor for Agriculture, ICRIER
Views are personal

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