Wrapped in all around uncertainty the economy faced the first wave; little was known about the nature of the pandemic, particularly the speed with which it can spread and the ways in which it can be controlled. So, there was a sledgehammer response on the policy front, total lockdown was considered as the most prudent approach
By the time the country got hit by the second wave, it was clear that the spread across the country is likely to be uneven. However, the speed of escalation in infection and its severity surprised both the medical fraternity and policymakers. The healthcare infrastructure in which one has underinvested for decades was clearly inadequate compared to the requirements in terms of facilities and manpower. The approach on the policy front became more localized under a common umbrella, the spatial and temporal differences were too obvious to be ignored. This led to partial lockdown and phased relaxation. Early resumption of intrastate movement and some allowance for interstate movement reduced the adverse impact on the supply chain considerably, manufacturing enterprises particularly the larger ones could continue with production.
Now that we have an interlude, which could albeit be brief between the second and third waves, some serious rethinking is needed to ensure that life and livelihood conditions remain less affected during the future waves of the pandemic. This has mainly two aspects-Firstly, the healthcare one, which deals with vaccination and healthcare infrastructure involving both Centre and States. Secondly, there is a macroeconomic one which links up life with livelihood, employment, and income generation. Fortunately, the Centre’s expected fiscal deficit even after the second wave is within manageable limits. This provides the scope to push up the deficit by at least 1% to meet additional healthcare and stimulus expenditures.
This may require additional borrowing; the requirement could well be more than anticipated if disinvestment targets are not met. It is interesting to note that the appetite for Indian paper has started coming back post second wave. This apart, innovative indirect monetization by RBI is always there as a fallback option. While the yield curve has been managed quite well till date, a marginal trade-off between growth and inflation could be needed.
This brings us to the broader question of what needs to be done to get the economy back on the rails. In the pre-COVID period, for several years consumption growth had become the key driver of overall growth. Once the consumption growth faltered (-7.3% in 20-21) due to lockdown related impact, the economic growth came down dramatically.
So far as consumption is concerned private consumption expenditure accounts for 56% of GDP, whereas government consumption expenditure is around 12% of GDP. If private consumption does not revive it will be difficult to get the economy back on track. Lockdown, loss of employment due to enterprises closing down and wage loss are some of the key factors behind the decline in consumption demand, once widespread vaccination ensures reopening of business enterprises the station can be expected to improve. More than two-thirds of GDP growth has come from consumption expenditure growth during last recent years.
In the area of investment, there is a clear sign of deceleration, its share in GDP has come down from 34% to marginally less than 30% in recent years. Around two-thirds of the investments take place in the private sector. There are several issues that continue to affect investment, the first one is capacity utilization, which is around 66%, this is far less than the 80% benchmark beyond which new investment starts picking up. Secondly, the twin balance-sheet problem had an adverse effect, which is getting sorted out gradually. Thirdly the MSME sector had been badly affected by lockdown measures.
Given this situation, it may be useful to increase Government capital expenditure such that the private sector can get interlinked to it. RBI study shows that the impact of consumption and investment on growth is more when the economy is in a down cycle compared to when the economy is in an upward swing. In this context, it may be worthwhile to examine the role of each.
Given the fact that lockdown either total or partial will have an adverse impact on livelihood, employment, and income it is often suggested that the easiest way to improve consumption is to opt for short term cash transfers. The problem is for such a transfer payment to work efficiently it must be a prolonged one and substantial. Further, from a fiscal point of view, it must be sustainable. As we do not have a universal basic income model in operation it is not easy to implement. The nearest option is to use free food delivery, Jan-Dhan account payment and expansion of MGNREGA. These options have been tried to some extent however this may not be to everyone’s satisfaction. Without getting into an ‘either/or’ controversy it may be more useful to look at the investment option. Investment will have the potential to create further employment and consumption, the impact multiplier effect of public investment or capital expenditure is 2.5 and the cumulate multiplier is around 5, whereas that of transfer payments is less than 1 for both impact and cumulative multiplier. If an investment program is chosen carefully then it has the potential to become a major driver of growth. These observations are supported by the research work done by the National Institute of Public Finance and Policy (NIPFP), RBI and others.
The external sector is one area where one has witnessed visible improvements. Significant positive developments have taken place in the growth of exports of engineering goods, chemicals and pharma and agricultural products. Interestingly on the imports side demand for capital goods in the country has gone up. This along with the recently announced corporate results of capital goods enterprises tend to indicate that the future could be brighter. Corporate investments appear to be picking up.
There are different predictions about the third wave, each one is less cheerful than the other. However, there is one difference, a significant part of the country is getting vaccinated. This may result in a lower level of virulence. Secondly, the experience with the previous waves have taught the policymakers and business enterprises to contain the adverse impact through micro-level or regional level healthcare management. It has also taught that complete lockdown over an extended period is neither a necessary nor a sufficient condition for containing the malice.
(Siddhartha Roy, Former Economic Advisor, Tata Group)
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