The CoVID-19 pandemic has weighed heavily on lives and livelihoods of millions of people across the world. Its impact on the global economy has been estimated by the IMF to be considerably worse than the global financial crisis of 2008. With India already reeling under the impact of inflationary pressure, rising unemployment, and a downward trend in the rate of growth from FY 2016-17, the impact of the CoVID-19 pandemic has only compounded the stress on the economy. This article sets out the authors’ views on the ways and means of revival of the Indian economy post lockdown by empowering the oft forgotten vulnerable sections of its population.
The extent of the pressure on liquidity had been unanticipated for both – employers and employees. The unemployment rate in April 2020 as per the Centre for Monitoring Indian Economy (CMIE) data was 23.5%. An estimated 12.2 crore Indians have lost their jobs in April 2020 alone. In line with the inflationary pressure that had set in from May 2019, consumer demand had been softening months before the pandemic hit like the seemingly last straw. Firms across the entire value chain in multiple sectors have suffered a disruption in operations like never before due to the pandemic.
India entered the lockdown in an unenviable economic situation. Wholesale Price Index (WPI) inflation registered at 0.58% in November 2019, rising to 3.52% between November 2019 to January 2020. The drying up of incomes has affected households and firms in equal measure. Data shows that aggregate capacity utilisation for industry declined to 68.6% in the third quarter of 2019-20 – from 69.1% in the second quarter – largely due to weakened demand. The slow decline of consumer demand has reached its tipping point after the CoVID-19 pandemic.
The revival of the economy after lockdown will be closely linked to the revival of consumer demand, which showed a downward trend even before the imposition of the country-wide lockdown. Weak internal and external demand conditions remained prevalent for the better part of last year. The government’s mounting fiscal deficit raises doubts on the possibility of increase in government expenditure. Spurring demand in the Indian economy after a partial or near-total lifting of the lockdown is bound to be an economic quagmire.
While the concerns over India’s path to economic recovery are well-founded, the outlook may not be as bleak as predicted. Counting the silver linings, consumer sentiment has remained positive in spite of the downward pressure on real income and looming uncertainty about the future. A recent McKinsey survey has shown that Indians are considerably more optimistic than the rest of the world about the prospects of their country’s economic recovery after the lockdown, with India being the highest in consumer optimism among a group of 41 countries – including the United States, UK, France, Germany, Italy, South Africa and China. While it is difficult to ascertain the exact reason for this optimism, the size of India’s population has a story to tell. Our country’s burgeoning youth demographic presents a unique opportunity to revive internal demand and recover from the decline in consumer expenditure, relatively quicker than Europe and North America.
The Atmanirbhar Bharat financial package of Rs. 20 lakh crores announced in five tranches between 13.05.2020 to 17.05.2020 has unveiled the government’s intent to tackle the economic fallout of the lockdown – primarily through indirect measures to improve liquidity. However, the actual cost to the exchequer in direct fiscal outlays, as per a liberal estimate, amounts to a little over Rs. 2 lakh crores. It remains to be seen whether the impetus provided by the central government will provide the necessary stimulus to the various sectors reeling under the impact of the pandemic.
The challenge of low demand is linked to the drying up of incomes as well as the permanent loss of income due to large scale layoffs. There is a need to recognise the magnitude of the unemployment crisis if the decrease in demand is to be addressed in a sustained and effective manner.
PREPARING FOR ECONOMIC REVIVAL
Considering the population size of India, a bottom up approach to stimulate growth in demand, should be targeted. To this end, the central and state governments can play an important role through increased spending in infrastructure development e.g. roads, highways, hospitals, warehouses and cold storage, bridges and dams, ports and such sectors requiring large scale deployment of skilled and unskilled manpower, cement, heavy duty machinery, transportation vehicles and a host of supporting activities.
Irrigation projects are a good example for government spending with sustained valuable returns. It would help address water management concerns for farmers and reduce the monsoon dependency of India’s agriculture sector, thereby improving food security and rural incomes in the long term. Irrigation projects would generate gainful employment, thereby improving household incomes in the immediate future and providing disposable income to workers to push demand.
Direct benefit transfers are an effective and time-tested strategy to boost demand. The poorest sections of the population are in dire need of resources to address their immediate consumption needs. This requirement may somewhat be addressed by the provision of free food grain to migrant workers as announced in Tranche 2 of the relief package, but the concerns regarding its implementation loom large. Securing 100% delivery of food grain to its intended beneficiaries is a challenge, given the complexities of the public distribution system. Providing direct income support to the migrant labour and unorganised sector workers is an immediate need.
Increased allocation of Rs. 40,000 crores to MGNREGS over and above the Rs. 61,000 crores budgeted for this year as announced in Tranche 4 of the Atmanirbhar Bharat package shows the government’s conscious effort to create more rural employment. This would not only help rural households with much needed income security, especially in view of the large numbers of migrant labour workforce that has returned to their home states, but can also help in long term decentralization of small and medium scale manufacturing to rural areas.
Tranche 3 of the Atmanirbhar Bharat relief package has reaffirmed the government’s long-stated commitment towards administrative reforms of the agriculture sector. The proposed reforms of agricultural markets through amendments to the Essential Commodities Act, 1955 and the Agricultural Produce Marketing Committee legislations would enable better realisation of farm incomes by providing a unified, pan-India marketplace for farm produce. However, the improvement of rural incomes and spurring of rural demand will largely depend on the speed and efficiency of the intended reforms.
A major area of infrastructure development is the creation and improvement of medical facilities and hospitals across the length and breadth of the country. The CoVID-19 pandemic has brought forth our under-preparedness in the health sector. The post lockdown need for economic speed allows an opportunity to the central government to focus on the health sector, pharmaceutical industries, manufacturing facilities and medical education.
Considering the limitations on government spending, these projects can be developed on PPP basis with a secured and well-defined stage-wise payment system to the private developers. This in turn, is likely to bring about higher borrowings from banks, which are presently flushed with money, given the lower interest rates on commercial loans.
Development of welfare housing in Tier 1 and Tier 2 cities, along with necessary sanitation, water and schools, is yet another area that on the one hand demands focus, while on the other, promises an opportunity to raise the living standards of the millions of migrant workers and economically weak families who are currently forced to live in deplorable conditions in slums and shanties without minimum basic amenities.
The engagement of mainstream and ancillary industries involved with the infrastructure sector and gearing up of production, will provide the necessary impetus to consumer demand.
Any attempt at reviving demand and resuscitating the economy will need to operate within a broad framework that focusses on dynamic policymaking, requisites of hygiene and sanitation, and responsive bureaucracy. At the same time, it would be necessary to ensure that supply chain networks recover and scale up at a pace appropriate to meet the recovery in demand.
Sectors that have remained relatively stable in the economic downturn due to lockdown have owed it, in part, to the continued maintenance of supply chains and exemptions from movement restrictions. Therefore, governments should consider allowing seamless mobility for all entities in the supply chain across most sectors. Since the functioning of key sectors would be intrinsically linked to that of allied sectors, restrictions on movement should be kept at a minimum. Elaborate Standards of Procedure (SOPs) should be issued within a framework provided by the health departments of state governments and implemented by the industry to ensure that all operational activity follows the norms of social distancing and personal hygiene.
Governments at all levels – Centre, State and district administrations should develop dynamic and nimble policymaking that is quick to respond to changes in the number of new coronavirus infections. Frequent review of the districts’ ‘zone’ classification in line with changes in the number of infections and the shape of the coronavirus curve would be imperative to allow relatively safe districts to function with a semblance of normalcy. It is important to keep in mind that most State capitals and major cities are falling under ‘red’ zones, which severely restricts the ability of businesses located even in ‘orange’ or ‘green’ zones to benefit from eased restrictions, since most economic activity is intrinsically linked to the major cities. The classification of ‘containment’ and ‘buffer’ zones too, should be frequently reviewed.
Recent interviews by the Union Minister of Finance have revealed that the political dispensation is keen to remember India’s lessons of economic recovery from the 2008 global recession. A hunt for growth by prolonging measures such as increased government expenditure and reduced lending rates allowed a short-term recovery by 2010, but led to the bigger crises of double-digit inflation, fiscal deficit and current account deficit in 2012-14.
In the present scenario, whereas some amount of fiscal conservatism is necessary, its relevance must not be overstated in policy decisions. The Ministry of Finance has positioned itself as willing to take more measures after assessing the impact of the Atmanirbhar Bharat package. The most vulnerable sections of the society must have its subsistence needs addressed immediately. Putting money in the hands of those most deeply affected by the crisis forms the basis not just for the State’s welfare duties but will also help in meeting consumption needs and restarting the cycle of demand.
A wholistic vision for self-reliant India should necessarily support investments in social infrastructure – i.e. healthcare, education and skill-development. India has an opportunity to emerge from this crisis with the promise of an improved quality of life for its most vulnerable sections. Keeping the interests of migrant labour and unorganised sector workers at the heart of policy decisions even during crises such as a global pandemic will ensure that our labour force becomes more resilient and reliable. Measures such as the suspension or amendment of labour laws to the advantage of employers might increase the ease of doing business in the short term but run the grave risk of creating Indian sweatshops, attracting outgoing investments from China for all the wrong reasons. Similarly, improving learning outcomes from primary and secondary education, developing higher education and reinforcing the policy commitment towards increased skilling will ensure that India creates a future-ready workforce.
An ‘Atmanirbhar’ or self-reliant India will only materialise if its people have adequate purchasing power and an appetite for consumption that is sustainable to support this vision.