Targeted stimulus is crucial to revive economy

Sachchidanand Shukla | Updated on August 12, 2020 Published on August 12, 2020

Unlock demand with another stimulus   -  Getty Images/iStockphoto

The govt must identify sectors that can become multi-year growth stories. Also, higher social spending will have a positive effect

The Indian economy, which saw a recovery from the trough in April, now seems to be at the risk of faltering due to renewed lockdowns across regions. Most GDP forecasts are centred around a contraction of around 5 per cent in FY21, with the possibility of downside risks. The IMF, too, in its latest outlook released earlier this month, projects India to contract by 4.5 per cent in 2020. Moreover, the IMF expects the ensuing recovery in 2022 to be a weak one, with projections of just a 6 per cent growth. This implies that India’s FY22 GDP would barely cross the FY20 numbers. Such dire projections are not surprising given the uncertainties involving the pandemic and fears of second wave.

The government, on its part, paid attention to social insurance by way of distributing free food, cash transfers, etc., and followed it up with a ‘relief’’ package of ₹20 trillion to support the economy, with actual fiscal spending at around ₹2.3 trillion. However, that is clearly not enough. Now that the “unlock” is in progress, one needs to pay closer attention to the process of “unlocking” as it will impact sectors differently. This is critical as opening up of the economy is actually the biggest possible demand stimulus. A concerted revival push by the government will be needed to prevent any extremely uneven recovery. We now need a stimulus package followed by macroeconomic policies aiding a medium-term recovery. A delay could weigh on economic recovery in FY22 and beyond.

While households and the private sector are likely to continue to be cautious, the government can play a decisive role by boosting demand. There has been an income shock for all the stakeholders in the economy. The heightened uncertainty has hurt discretionary demand and capex. Another stimulus worth at least around 1 per cent of GDP may be required once a fair degree of unlock has been achieved, as Say’s law of supply creating its own demand may not hold.

However, untargeted fiscal stimulus payments in these Covid times may be less effective than the those made before. Beneficiaries may end up saving more or will spend their stimulus payment on non-durable essentials, which implies that cash flows immediately to agents with lower marginal propensity to consume (MPC) may not help much. So how can the government impart a growth push? Here are some ways:

Targeted and timely stimulus: The government should look at the stimulus with the dual lens of aiding medium term recovery as well as boosting job creation.

The government must identify sectors that can absorb large amount of capital and become multi-year growth stories. This list can include sectors such as agriculture and the allied supply chain, healthcare, aerospace and defence, and mining. It must start clearing the regulatory cobwebs around these sectors with alacrity. Policies must now transition to those that help ensure resources are reallocated appropriately beyond the initial focus on preventing bankruptcies of incumbent firms. This strategy should include restoring a conducive business environment; diversifying the economy and encouraging structural transformation; and making use of technological advances.

Employment lens: Focus on sectors which have a higher employment-creating potential — auto (especially EVs), electronic goods, chemicals, textiles, gem and jewellery, leather, and food processing.

Mend the credit cycle: India has been struggling with pre-existing balance sheet vulnerabilities in the financial sector which can worsen under the impact of the pandemic. Corporate as well as household balance-sheets were strained and now face sharp economic contraction exposing them to the risk of a broader impact on their solvency. Thus, a one-time settlement scheme for banks and a recapitalisation of public sector banks should be looked at with a sense of urgency. There’s need for directed stimulus to services sub-sectors badly hit by the pandemic such as aviation, entertainment and recreation, tourism, etc., to prevent corporate bankruptcy.

Privatisation drive: The government has already announced its intention to privatise, saying there will be no more than four PSUs in strategic sectors. What is now needed is a big-bang drive with a clear designation of sectors into strategic and non-strategic with a timeline and set of policy enunciations to speed this up.

Double down on social schemes: According to the IMF, social expenditure is shown to have a larger positive multiplier effect on the economy than measures such as tax breaks. In this regard, the government can double down on schemes such as Garib Kalyan Rojgar Abhiyan, PMGKY, MGNREGS and PM KISAN.

However, the key will be to support the nascent recovery with other economic reforms without exacerbating vulnerabilities through an overuse of fiscal stimulus.

The writer is Chief Economist,

Mahindra Group

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Published on August 12, 2020
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