Economy needs the ‘growth vaccine’

Finally, there is some clarity about where the economy stands now and where it is headed to. At 23.9 per cent contraction during the April-June quarter of this fiscal, the Indian economy earned the unenviable sobriquet of ‘one of the fastest shrinking larger economies in the world’, shedding the tag of ‘one of the fastest growing larger economies in the world’ which it was touting until recently.

The estimates published by the NSO are bound to come under fire from several quarters for the insufficient data points, leading to inaccurate estimates; they nevertheless show how deep the viral infection runs into the economy.

If the Q1 GDP numbers are worrying, incoming data shows that the Covid-induced contraction in the economy may well spill over to the next few quarters as State governments are bound to announce more localised lockdowns in the wake of the fast spreading viral infection. In other words, India is now staring at the spectre of a prolonged recession — contraction in economic growth over three quarters — putting lives and livelihood of millions of people at risk.

Though this may sound alarmist, it mirrors the thinking of many realistic economists, cutting across a whole spectrum of economic and political thinking. By merely invoking the ‘extraordinary situations’ clause the Government cannot wash its hands off from the morass in which the economy is in now. In fact, there were ample warning signs about a structural slowdown in the economy for the Government to see and act. Arguably, the Covid-19 pandemic has just accelerated the economic contraction that in fact started a full fiscal year before.

That being debatable, the issue that needs urgent attention is how to cushion the deep dive in economic growth and kick-start the economy without any more procrastinations or delays. This is of paramount importance, as the fall in growth is much more broad-based than expected and the latest numbers point to the fallacy of ‘Bharat’ coming to the rescue of the economy as the so-called ‘green shoots’ are vanishing as the virus started engulfing the hitherto immune hinterlands.

The policy response should happen at three levels — political, fiscal as well as on the monetary front. To begin with, the Central Government, which enjoys huge political capital, should start building bridges with the opposition parties and State governments to evolve a consensus on policy reactions to avert an impending recession before it is too late.

Second, it only needs straightforward analysis to understand that unconventional tools are the need of the hour and such a change in thinking could help the Centre to shed its fiscal fundamentalist view and increase public expenditure, which seems to be the only way out from the contraction.

The RBI, on its part, should shed its tunnel view on inflation management and adopt a new framework to conduct monetary policy that supports growth, giving the Centre enough headroom for fiscal expansion going forward. Keeping a mere accommodative stance is no longer sufficient. The apex bank should expand its second mandate of banker to the Government by helping it raise resources from the markets — both domestic and global — if not monetising the deficit which incidentally is in sync with the thinking of most central banks across the world.

The deployment of such unconventional tool-kits are important from many angles. First, the famed fable of the recent India growth story evolved around the singular theme of consumption. With pandemic leading to massive job losses and income destruction, the Government has to breathe new life into the core consumption unmindful of deficit numbers.

Research has unequivocally showed that in a shrinking economy accelerated public spending will revive the overall consumption with private consumption catching up with a lag.

Two, an investment-led growth may be an ideal scenario, but it may be risky to believe that such an episode will play out when the economic activity is collapsing since most industries are operating well below their installed capacity. Therefore, touting about a `V’-shaped recovery may be construed as nothing but bravado in these difficult times.

Third, a revival in private consumption is not in sight since households have cut back on their discretionary spending in the wake of income loss. Therefore, the Government is forced to find resources to maintain household consumption by rolling out direct and/or indirect income supporting measures.

It is indeed a truism that the Government is staring at a fiscal cliff with revenues diving to historical lows forcing it to cut back on even budgetary expenditure. But paring down government spending at this juncture may cost the economy dearly as it dries up the only robust source of expenditure that meaningfully translates into job creating and income generating measures.

If domestic resource crunch is the issue, then the Government can look beyond the borders to raise money by attracting foreign savings. It may be in order here to point out that the record run up in stocks in the past few months was fuelled by a massive inflow of foreign money into the markets. With the rupee remaining as one of the best-performing currencies among the emerging markets and interest rates in developed nations ruling at near zero levels and expected to remain there for some time to come, India could attract this surplus global liquidity into the system with ease, provided economic growth picks up in the immediate term.

On the balance, it is clear that growth is the vaccine that the economy needs to prevent it from sinking into a deep-rooted recession. And this vaccine should not be limited to stimulus but should work as a steroid. However, for this to happen, both the Government and RBI should shed their shibboleths by deploying more unconventional as well as new tools. Else, it will be tantamount to disregard of duty to the people by a Government which still enjoys popular support.

Vinod Kumar is an independent economist and Suresh Babu is Professor of economics at IIT, Madras. The views are personal

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