Harsh Pati Singhania

The Indian economy has been recovering well following the Covid disruptions with GDP growth for the current fiscal pegged at 9.2 per cent by the CSO’s advance estimates after a record contraction of 7.3 per cent last year. While most sectors are expected to reach pre-Covid levels by end of the year, trade, hospitality and communications services, which accounts for a fifth of overall gross value added is unlikely to make up for the loss accrued in 2020-21, even by the end of the year.

Moreover overall growth rebound could be particularly tough to achieve as the lockdowns and mobility restrictions following the third wave have again disrupted normal life and hit businesses.

Consumption expenditure, which accounts for 60 per cent of GDP, would still remain 3 per cent lower than pre-Covid level by end of the fiscal. In fact, per capita consumption has come back to only 2018-19 level, highlighting divergent recovery trends (K-shaped recovery) amongst different income groups in the country.

For example, valuables component of demand side GDP, which are beyond the reach of majority of the population, have reached a record high during the pandemic. This highlights the greater demand contraction for the bottom half, particularly for households earning up to ₹1 lakh per annum. They are finding it hard to recover as evidenced in their numbers that have swelled from 10 per cent of all households in 2019-20 to 17 per cent in 2020-21. One would however hasten to add that taxing the upper end is not going to be the solution.

Jobs factor

Some of those who had lost jobs during the pandemic are yet to get one or are facing reduced incomes as they are now into informal jobs. Although IT and e-commerce sectors continue to recruit people, they are unlikely to compensate for job losses in contact-intensive segments like transport, hospitality, tourism and retail, which is impacting demand.

The Budget has provided fiscal headroom by opting for gradual glide path to 3 per cent fiscal deficit prescribed under the Fiscal Responsibility and Budget Management (FRBM) Act. Yet the Centre’s gross fiscal deficit is less than half of its annual target in the first eight months of this year as against overshooting the annual target by 12-35 per cent till November in the last four years.

Although the government had budgeted for a fiscal deficit of 6.8 per cent of the GDP this year, it may end up at 6.2 per cent following robust growth in tax revenues that could possibly allow the government a higher fiscal space of over ₹1 lakh crore.

The government could use this fiscal space in many ways to invigorate demand that is still below pre-pandemic levels instead of debt reduction. With inflation remaining high, it is impacting the bottom of the pyramid, with FMCG volume growth declining to (-) 4 per cent in the last three months.

MGNREGS support

An expansion in the outlay on MGNREGS would enable rural employment, while introduction of an urban poor employment initiative like Mukhyamantri Karma Tatpara Abhiyan in Odisha, would put more money in the hands of the people to spend, particularly on the essentials. The government must also continue to spend more on infrastructure and PM Awas Yojana that will support housing and construction sectors, which have forward and backward linkages to nearly 200 sectors, particularly as private investments will lag due to subdued demand.

Relaxation on taxes for individuals to support the middle income households/salaried class can further boost demand. The informal sector needs more handholding as most may be still out of jobs. For this a cash transfer can be provided to poor households as was done during the first lockdown.

Supporting livelihood would also entail supporting businesses especially smaller ones. More importantly the stimulus has to be tailor made for those that have been impacted the most. The government could guarantee bank loans of 50 per cent of income of small hotels, restaurants, takeaways etc.

Emergency Credit Line Guarantee Scheme (ECLGS) has been a big boost to MSMEs during the pandemic. According to SBI research, it has prevented 1.35 million MSME accounts from going bust, saving around 15 million jobs, and in effect, supporting 60 million family members.

Going by its success, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE) should be revamped using best practices from ECLGS. There is also a need to change the classification norms of MSMEs for NPAs to 180 days, which will ensure that they are not constrained to divert their working capital towards servicing loans. Moreover State governments could provide incentives for MSME investments to build supply chains under PLI scheme.

Ultimately, consumer sentiments play a big role in running of the economy. The key to keeping the economy ticking is to create consumer demand and greater employment opportunities.

The writer is Director JK Organisation and Past President FICCI

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