Booster dose

The Centre would do well to pay attention to the Reserve Bank of India’s grim prognosis of near-term economic conditions and to move fast in implementing fiscal measures to put the economy back on the path of sustained growth. The RBI’s Annual Report for 2020-21 has identified sluggish private investment as the missing link in reviving the economy and says that its linkages to other segments of the economy will enable durable growth. The central bank also points out that the government had played a large role in the economic revival last year and it is time that private sector too does the needful. Private consumption that accounts for 56 per cent of the economy had contracted sharply last fiscal due to the pandemic and government consumption expenditure had acted as a cushion to smooth aggregate demand. The government also accelerated its capital expenditure, causing a revival in gross capital formation that enabled the overall economy to move from contraction to growth in the third quarter of the last fiscal year.

But with current demand conditions being weak, resulting in very low capacity utilisation rates, the private sector will not have the incentive to start a strong investment cycle. The Centre will therefore have to continue to spend to support demand in the near future and take fiscal action to boost consumption once the second wave tapers down. With the current Covid-19 case-load as well as the fatalities at much higher levels compared to last year and with lock-downs impacting daily wage earners, small businesses and low income households, there is immediate need to support these groups. The Centre needs to announce a set of stimulus measures akin to that announced last year including providing food grains and direct cash transfers to the Jan Dhan accounts. Increasing the allocations to schemes under MGNREGS will help support rural income and also demand in rural areas. There is also urgent need to provide liquidity support through government guarantees and low interest rate loans to micro, small and medium enterprises, microfinance institutions and NBFCs so that they can stay afloat. The Emergency Credit Line Guarantee Scheme should be extended for few more months and its scope can be further expanded to include other pandemic-hit sectors as well.

The Centre may also have to design a support package for service industries such as airlines, hotels and tourism that took a big hit in the first wave and were struggling even as the second wave set in. Given the debilitating impact of the virus, the Centre may have no choice other than to spend or forego revenue, to help the economy get through this very difficult phase.

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