The past two years have witnessed so many ups and downs for the country that it is even hard to keep record now. With estimations slashing every which week, economic factors presenting a shabby future picture, and the markets portraying a fundamental shift in behaviour, we are standing at a curve of uncertainty right now.
Economists are standing at a crossroad of decisions right now because there is no consistency in the facts we are looking at and the predictions that are being made. However, one common thing that has come up in all economic discussions is how an economic stimulus is important for stimulating the economy, the global economy presenting a live example for it. Indian economy, on the other hand, completely failed to do it.
One primary reason for that hindrance is the approach that the stimulus packages released by the government of the country had. It is because the primary targets set for the ‘stimulus’ packages released by the country at a time when the pandemic was reigning at its full swing on the economy, is that it attempted to stabilise the economy, what we refer to as ‘revival’.
On the contrary, the need of the hour dictated a push, or a stimulus, to bolster the economy, referred to as ‘thriving’. To be completely fair, even the name itself is representative of what the purpose should have been. After all, the package was meant to be a ‘stimulus’, something that could help the economy pick up pace in the short run.
This was reflected on the large credit based assistances in the stimulus packages, and the projects that could reap benefit only in the long run. For the short run, however, it was time and again made clear that these fiscal support plans are not adequate, let alone sufficient. However, the purpose of this space is not to dwell on the past stimulus packages because we’ve done a fair share of it. What it aims to do, however, is to suggest changes for the future because the need to have one is just upon us. Wait, was that last statement confusing? Well, let me clarify it for you.
Global growth and recovery-
The world economy has picked up pace and the recovered economies are waiting their turns to hold the battalion of global demand. China took the lead, followed by the United States, and now the United Kingdom is getting behind. While the world growth picking up is a good fundamental sign, it cannot be denied that the unevenness that is going to come with this growth would be hard to tackle.
Nonetheless, that’s a discussion for another time. As for India, even though the infections are a little low right now, the hanging threat of another wave has hindered the economy from unleashing its true potential due to the uncertainty. In the developed world as well, even though there are still instances of growing infection, the high rate of vaccination has brought along pace in the economy, with global demand booming up.
Now, what this essentially represents is that global economy is recovering, and that may cause problems for the Indian economy. It is because as the rich countries prepare themselves for a strong growth, their central banks would take a step in the direction of tightening the loosened monetary policy, bringing the levels back into normalcy.
This would come in effect as increase in interest rates in other economies, and a further subdued inflationary pressure. The tapering of the quantitative easing is also in order, and we do not even wish to consider the 2013 crisis to be a repercussion anymore. The picture is clearer now, isn’t it? What this means for the economy is that we need to brace ourselves in advance to mitigate any probable damage that could come our way.
The first step in this process should be to give our stimulus approach a 360 degree shift. We’ve said that the economy is recovering, so stabilisation is not exactly what we need right now. What we do need, however, is the need for stimulation. Let’s discuss in detail how that can be achieved. To begin with, the action plan should cover vulnerable sections, put-in place proper policy support for dealing with the already persisting inflation valve and opportunity creation through fiscal expenditure.
Current state of the Indian economy
This would become clear if we shed more light on the current state of the country’s economy. Even though there is still partial mobility in some places, the momentum of recovery has begun. Markets are picking pace and the levels are approaching the pre-pandemic levels, even though they were a little grim themselves. The inflationary pressure has caused trouble for the consumer demand side since the pandemic wreaked havoc on consumer savings.
Production is almost back to the level, even though the uncertainty of future is posing a big threat. The labour market, however, is in a bit of a volatile situation, with urgent need of government intervention. The stock markets are booming as never before and investments are reaching records high. The top few companies of the country, however, are on a deleveraging spree, reducing credit demand despite numerable attempts by banks to tempt. So, all in all, with its ups and downs, the country’s activity levels have, in fact, reached the pre-pandemic level.
This is concurrent with the tax collections made by the government in the last period. The corporate tax collections have aggregately been about INR 1.85 lakh crore for the April-June quarter of the current financial year. Now, this tax collection can prove to be very useful for us in assessing how the sectors have played out their post-pandemic journey, leaving us with the vulnerable ones.
As reported from data published by government sources, the collections have been largely made from the steel, medal, commodities, cement, pharma, banking, and IT sector. To be fair, a large credit for some of these sectors go to the export demand created by rich economies in the said quarter, providing a way for further economy boost for the country. Large metal prices, also, have been a contributing factor in the aggregate figure. The goods and services collections paint a healthy picture too.
Rural economy and employment
Another key area to discuss is the rural economy and how it looks like from the revival perspective. The continued demand for work under the MGNERGA scheme is representative of the brimming stress in the neighbourhood. As mentioned, labour market does seem a little disrupted right now, since the recovery hasn’t been what it optimally ought to have been.
How the rural demand and supply plays out will be contingent on the monsoon levels for now and the picture looks a little shabby from where we are looking. Needless to say, the rural economy is in critical need for government attention. If the government fails to aid the aching sector, it can be estimated that the economy at the whole would have to suffer consequences.
Consumer Demand and Inflation
Consumer demand has been representing a confusing picture. While factual understanding and empirical evidences support the low end discretionary consumption proposition, some durables like air conditioners and refrigerators did see a comeback. Inflation still remains a concerning factor, for both the consumers and the producers, attacking from both the food and petroleum price hike ends.
We posed the question of this inflation being not-so transitory a while ago, and looks like the answer is going more towards a yes. If so is the case, however, monetary policy tightening would have to take place, meaning higher interest rates eventually. This means that maintaining the growth curve can be a challenge if so happens, and the volatility of financial markets could further harden the process.
As for the provision of credit to small and medium enterprises for maintaining their businesses, the government’s Emergency Credit Line Guarantee scheme has proven to be fairly helpful. This has resulted in stabilisation of cash flows, thus maintaining solvency, and aid their growth and investment prospects.
Thus, all these different sects of the economy highlight the key areas and agendas that the government’s stimulus policies need to focus on. That is possible and worthy only if the government changes the policy len and alters the approach from stabilisation to growth.
Edited by Tanish Sachdev