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What do you need, Indian economy? – economy left in shackles and huge losses from covid-19
State of the Indian economy
The COVID-19 pandemic has had a large economic cost and the mildly recovering Indian economy has been left in shackles all over again. The hopes of recovery and growth are now a distant dream and we’re barely looking at survival right now. When we say the economy is left in shackles, we really mean it, look at the indicators to paint you the picture- The unemployment rate as published by the Centre for Monitoring Indian Economy has reached double digits to 11.9 percent, contributing to millions of job losses. The survey conducted by the central bank shows the worst seen consumer confidence in decades, with the future index also presenting grim expectations of income and recovery. The estimates of the gross product have been slashed from the early higher expectations. And we’re standing at the mount of more than 3 lakh dead bodies.
So, let’s ask our economy this one simple question? Let us not put our assumptions and notions on it, for once, and acknowledge what it really needs.
The major concern with the Indian economy as yet has been improper action steps due to incorrect assessment of the economy’s needs. Case in point the stimulus issued during the first wave was so fixated on saving the precious fiscal resources owing to the precautionary motives to save that it completely superseded the economy’s need for greater discretionary consumption.
The result, well, we’re still witnessing thanks to the clamped product, consumption, and income numbers. So this time around, let’s correctly analyze needs to ensure correct action steps.
Consumer confidence-
The people have borne great losses during the pandemic concerning losing their family members, in some cases the bread earners of the family and losing their jobs, and eventually, exhausting their savings. As is clearly inferred from the RBI’s future index data, the people have grim expectations of jobs and income in the future.
Thus, people would be severely revising their economic budgets and intertemporal choices in the face of uncertainty would be unsurprisingly bent towards more future consumption, or simply, precautionary savings in the current period. This means that the expectation that consumers will return back to pre-pandemic levels is not only fallacious but shallow.
As a result, the government needs to ensure another way to instill confidence in the consumers for them to increase consumption in the current period. One way for this achievement is through increased fiscal response targeted to households, direct incentives for firms, and increased spending on the improvement of public infrastructure. This increased expenditure in public health infrastructure is important both to control the situation and improve public confidence.
Along with that, it would also help propel more spending by the high-income households on traveling, restaurants, and other facilities, creating income for low-income households that depend on the provision of these in-person services. Developed economies and those on a better road to recovery have well-executed these action steps and are witnessing betterment empirically, as per data published by official sources.
Vaccination for all- quicker and more efficient
Now that we’ve established the government needs to change its approach to more fiscal spending, one of the major areas of expenditure has to be the vaccination drive. The postponed economic recovery that we’re looking at right now is the result of the government’s initial inefficient inoculation drive. Thankfully, the government has returned to the central procurement of the vaccines with some required revisions in the drive.
This, if ensured smoothly, would make a lot of difference in the country’s prospects. It is because this would aid the country in capitalizing on the increasing global demand thanks to the US stimulus dollars, to improve consumer confidence and categorical spending varied according to sections and stabilizing opening of the economy with less uncertainty.
Psychological factors like risk aversion and loss aversion in the face of uncertainty also play a major role in contributing to the intertemporal consumption choice and working on these areas would prove to be beneficial for the economy.
Job creation, please-
There’s no alternative for the unemployment problem other than to solve it and the government has been failing at it for a long time now. The country has witnessed tremendous layoffs during the pandemic and the urban poor were at the worst possible end, especially because there was no safety net like MGNERGA for them. Not only that, the government did not introduce any new unemployment benefit scheme nor were the other ones increased to commensurate the increasing unemployment rate, forcing people to exhaust their savings.
Government spending directed towards urban employment schemes or job creation would be one very important stimulus for the economy. Along with that, incentivizing firms would also help create more jobs and ultimately, create demand which is essential for the economy to get back on its feet.
Working on reducing income inequality-
The pandemic saw the worsening of the poor while the rich enjoyed more resources than ever. The risen gap in the income inequality sect has become a source of major concern, not only in welfare terms but for economic growth as well.
As the world’s superpower is changing its approach towards taxing the rich, the world is opening new viewpoints towards the probability and for a country like India, it is imperative that some benefits protracted from the top 1 percent in terms of income tax and corporate tax, and use it to provide benefits to the lower and middle class in an attempt to ensure reduced inequality.
This would also help drive up demand because the middle class contributes the most in aggregate demand and thus, would get back to the economy eventually.
So many fiscal resources, is it even plausible?
The concern with fiscal resources, especially with a tampered economy is that it would fire the inflation spree in the economy. However, if met by increased supply in response to the increasing demand, more so if the vaccination drive is successful, the problem of inflation would seem like the one that can be tackled, as opposed to the current state of the Indian economy, which is depressing, to say the least.
If not for these hefty fiscal numbers, the country would be looking at a prolonged economic slowdown and we cannot afford that. The monetary policy has also raised its arms due to the broken mechanism as a result of low credit growth despite lower lending rates.
So, in case you’re wondering if it’s worth it, the answer is a definite yes. It is time the government takes into its hands the rope of economic recovery and gives the economy what it actually needs.
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