A massive revival project is needed just to keep economy afloat

The Big Lens

The coronavirus has shrunk everything in its way, including economies. The Indian economy is no exception. While experts are debating the decimals and comparative indices, the common man on the street seems to be smart enough to know that something called ‘recession’ has hit him. And the impact of it could be harder and more severe than that of Covid-19 itself.

A World Bank study has projected unprecedented economic contraction in the months to come. The report says that the world economy could shrink between 5.2% and 8% in the current fiscal year. The economies of the developed countries are likely to shrink more than that of the developing countries. In 2019, before the Covid-19 pandemic, the size of the global economy was estimated at around $86.6 trillion. Even if the global economy shrinks by the lower estimate of 5-6%, world GDP would fall by about $4-5 trillion – a huge loss at a time when higher GDP growth is needed to pull hundreds of millions of people out of poverty, including in India.

The economic contraction is affected by and will have a cascading effect on a number of other factors, like the disruption of the supply chain, ineffective trade agreements, suspension of manufacturing units and sluggish demand. In India, this will result in worsening unemployment. Like in other emerging economies, the informal sector will suffer the most. Roughly half of India’s GDP, and 80-90% of non-agricultural employment, comes from the informal sector.

One important point of advice to all governments is the need to provide massive stimulus schemes to revive the sagging economies. The fall in global per capita income is expected to be phenomenal. The state of the Indian economy has never been as woeful as it is now. In fact, the economic contraction for the quarter
ending June 2020 is reported to be 23.9%, which is the worst that any country in the world has suffered. After all, we had the harshest (and earliest and longest) lockdown of all countries in the world. Now, merely stating the obvious — that even the economies of the G-7 countries have contracted — provides no relief to the suffering masses who are staring at a bleak future.

One may not fault the government entirely for this setback as a result of the Covid-19 lockdown. The pandemic, after all, was an ‘act of God’, according to the Finance Minister. But the economic wizards in the government should be aware and acknowledge that sectors like construction, trade, automobiles, manufacturing, mining and the service industry have all registered double-digit falls, which is the cumulative effect of the sluggish growth even during the pre-Covid-19 months. Only the agriculture sector is reported to have grown by about 3.4%, mainly due to a good monsoon.

The finance ministry is worried about the negative indicators in capital formation, which has fallen by about 47%, even as private spending in the quarter ending June has fallen by about 27%. Just four months into the fiscal, the government has already exceeded the fiscal deficit target set for the whole year, thanks to the huge fall in revenue receipts for the first quarter and rising expenditure, including on the stimulus measures it has announced. The government will have to make a realistic assessment of the effects of the stimulus package, the moratorium on debt repayment and other tax and GST reliefs offered. One important issue that the government needs to take into consideration are the problems in data collection by the Central Statistical Organisation as far as sectoral setbacks and fall in informal sector revenue and employment are concerned.

No lending institution can withstand bad loans, or non-performing assets (NPA), beyond a limit. While the public sector banks’ NPAs stand at over Rs 7 lakh crore, that of the private banks have crossed Rs 2 lakh crore. By the time the loan moratorium period ends, many enterprises would have reached a point of no return, and NPAs could balloon. The government alone cannot handle the situation in ensuring that businesses survive. A total overhauling of the market mechanism is required at this juncture. One part of this would be to increase, in the short term, the number of domestic infrastructure projects, facilitate project exports by the private sector, hiving off Lines of Credit (LOC) projects to the private sector or fast-tracking them via a PPP model. There is also potential for India to improve its economic diplomacy and enter markets from where China may retreat for whatever reason. Ministries and departments should not be allowed to delay and dither in this approach.

The last five years have witnessed a gradual fall in GDP growth, and indeed, this year, it is set to shrink considerably. Covid-19 affects everyone but the weak and the ailing ones with lower immunity are affected more. The pandemic’s effect on economies is similar – economies that were already experiencing weaknesses are the worst affected. The Indian economy is a case in point. A weak and ailing economy which was struggling to build immunity and insulate itself from future shocks has been hit where it hurts most.

The Prime Minister’s appeal to speed up Make in India and Aatmanirbhar Bharat should be given a policy framework urgently. As the lockdown is relaxed, a massive economic revival project is needed to keep the economy afloat and help it reach shore safely.