On August 31 the government officially announced that the Indian economy had contracted by nearly 24 per cent in the first quarter of the current fiscal 2020-21, 23.9 per cent to be precise. This estimate was broadly in line with the expectation of most economists and analysts given India had one of the world’s strictest lockdowns.
Also, the extent of contraction was not surprising as India went into lockdown on March 25 and there was virtually no economic activity apart from production and sales of essential goods in the months of April and May – the first two months of the first quarter.
The lockdown was gradually lifted from June though there were local lockdowns and also ‘weekend’ lockdowns resorted to by various State governments. Though economic activity has started picking up gradually, it is happening in an atmosphere of uncertainty.
Atmosphere of uncertainty
The uncertainty is on two counts. One, the pandemic itself is still raging especially in countries like India, which is third now in terms of both infections and death rates. While the vaccine is still many months away, no one seems to know when this virus will peak and when it will flatten.
Two, for businesses there is always this lingering uncertainty that governments, both at the Centre or the State level, can re-impose lockdowns if they feel that things are getting out of hand. It becomes very difficult for businesses to operate in this climate of uncertainty.
Government stimulus
So how has the government done so far in dealing with the economic impact of the pandemic? Despite the hype created over the Atmanirbhar package and its accent on self-reliance, the general consensus among economists is that the government has been too conservative in its spending. Though the government claims that it is spending up to 10 per cent of the GDP, in real terms it works out to just two per cent, which pales into insignificance when compared to the spending of countries such as the US, Japan, South Korea, and Brazil.
The latest economist to berate the government’s niggardly efforts is former RBI Governor Raghuram Rajan. In a widely dissected and commented-upon Op-Ed article, Rajan says that the government’s efforts to conserve resources for the future are self-defeating.
He further says, “If you think of the economy as a patient, relief is the sustenance the patient needs while on the sickbed and fighting the disease.”
He has exhorted the government to spend more now as people are suffering in the present. He says, “Think of economic stimulus as a tonic. When the disease is vanquished, it can help the patient get out of her sickbed faster. But if the patient has atrophied, the stimulus will have little effect.”
Rajan has urged the government to find resources on a war-footing and expand schemes such as MGNREGA which will provide jobs and income to the desperate people. He has called for immediate cash transfers to people. The government earmarked ₹40,000 crore for the MGNREGA scheme this week.
Putting more money into the Jan Dhan accounts of people is another way of providing immediate relief to people.
Pronab Sen, former Chief Statistician, in a recent interview with The Wire website, says that depositing ₹500 in every Jan Dhan account, which the government is doing now, is not enough and this has to be enhanced to ₹3,000-4,000. This, he believes, will revive the spending cycle through what economists call the ‘multiplier effect’.
Rajan has also called for tax rebates for small and medium firms – on both corporate income and GST – to help them tide over the crisis. The government’s approach so far on helping the MSMEs has been on the credit side.
Veteran journalist Swaminathan Anklesaria Aiyar too in his ‘Swaminomics’ column has called for phasing out lockdowns and giving more cash to the poor. He too has castigated the government’s stimulus efforts. He says that even nations with a similar economic profile such as Brazil (with 11.8 per cent of spending) and Turkey (10.8 per cent) have been more generous in their spending than India.
He says that the poor are worst-hit and are more likely to spend more of the cash they receive.
Farm sector, a bright spot
The agriculture sector was the lone bright spot in the first quarter growing at 3.4 per cent. This is largely due to the good monsoon and robust Kharif sowing. But here again, many economists have warned that this growth is unlikely to translate into higher incomes for farmers given the structural deficiencies in that sector.
Since 60 per cent of rural incomes are being generated by non-farm activities, a demand revival in the farm sector is unlikely to make even a small impact on the overall demand revival in the economy.
These are incredibly challenging times. The Covid pandemic is a ‘Black Swan’ event which probably visits us once in a century. But given the huge political capital that the Modi government enjoys, it would be a tragedy of monumental proportions if it is found wanting on the economic front.