It is a widely held view that every crisis also presents an opportunity. Given the prevalence of inequality in Indian economy, the implementation of a fiscal stimulus across sectors will not only lift the economy out of the woods, but also address some of the existing distortions in income and wealth distribution.
The United Nations, in its mid-year update of the World Economic Situation and Prospects (WESP) which was first released in January 2021, projected that the Indian economy would grow at 10.1 per cent in the calendar year 2022, nearly double the 5.9 per cent growth forecast for the country in the January report.
At a growth rate of 10.1 per cent in 2022, India will be the fastest growing major economy in the world, ahead of China, which is projected to grow at 5.8 per cent, a slowdown from 8.2 per cent in 2021.
The mid-year update said that India will register a 7.5-per cent growth rate in calendar year 2021, after an estimated contraction of 6.8 per cent in 2020.
A Blueprint for Economic Revival
India has been particularly affected by a brutal second wave, which is overwhelming the public health system in large parts of the country. The country has expanded vaccine eligibility and is ramping up supply in every possible manner, but access to vaccines is unequal and insufficient to meet the massive demand. To manage the crisis, government is working on the below key issues to revamp the economy:
The first fiscal intervention should be in making food available to as many as possible. That can free substantial amounts of purchasing power for other kind of consumptions. With inequalities remaining large within the structure of Indian economy, this pandemic can be an opportunity for redistributive measures. Universalizing the public distribution system (PDS) would be a good starting point and the government is considering this at priority.
Apart from boosting purchasing power and thereby consumption demand, the employment guarantee scheme has the potential to raise and stabilize urban wages. This would also create a stable national labour market by regularizing inter-state migration that can continuously balance surplus and shortage in different labour markets. The scheme has the potential to create urban assets like environment-friendly green public spaces and can augment the existing central government endeavours like smart cities. Many states have started this initiative already.
It is quite comprehensible that the government is in no position to provide input subsidies to all sectors. Thus, the process may start with the top five manufacturing sectors in terms of weightage – metals, oil, chemicals, processed food and automobile. Pharma can be, for the time being, kept out of this scheme (as it is presently showing positive growth). Once some of the initial beneficiary sectors revive themselves, those can be taken out and replaced by others – machinery & equipment, textiles, electrical equipment being the prominent among those.
Building infrastructure creates immediate employment and purchasing power, infusing demand into the system. Through multiplier effect, it can then feed into the future investment cycle as well. In the short to medium term, India has to rely on debt financing to boost public investment in order to revive the economy. Limited fiscal space will not allow India to go for a tax-financed model, which may adversely affect already flagging demand. A recent IMF report on infrastructure has mentioned this. The central government recognized this even before the pandemic when it unveiled the $1.5 trillion National Infrastructure Pipeline, based on Infrastructure Vision 2025, in December 2019. Strengthening and augmenting health infra, urban planning, roads, rural infra and digital infrastructure are going to be the key drivers even in the long run.
To provide fiscal push to the economy, FRBM (Fiscal Responsibility and Budgetary Management) Act needs to be put on hold for two years. The government has already made use of the flexibility enshrined in the FRBM Act under exceptional circumstances in 2019-20 and 2020-21 budgets, with targeted budget deficits put 0.5 percent (of GDP) higher than the FRBM mandated ones. Conforming with the FRBM leaves almost no fiscal space for any stimulus now. But there is always a case for suspension of the FRBM Act, as had been done during the 2008 global financial crisis.
While India has to successfully battle the second wave, it is important not to create panic, but stay calm. The surge will settle soon and what worked before during the first will surely work again — but for that, a mix of scientific, administrative and behavioural changes are essential. Government is taking all reasonable steps to overcome this global crisis and will soon achieve success in flattening the second wave curve and thereby attaining economic recovery once again.
About the Author
Author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants, is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.