The way forward
#GS3 #Economy #GS2 #Governance
According to some estimates, the 33-day lockdown in this financial year, April 1 to May 3, which essentially translates to a loss of 23 full working days, will lead to an economic contraction this financial year.
- Even after the lockdown is fully lifted, economic activities are unlikely to return to normal in the near term.
- The impact of job and income losses, especially those in the informal sector, consumer behaviour —discretionary spending may take a hit — risk aversion by firms and banks, and continuation of social distancing norms, among others, will determine how economic activity shapes up after the lockdown.
- Much will also depend on the depth and breadth of the policy response.
Govt needs to step up
- The Reserve Bank of India (RBI) has undertaken a series of measures aimed at easing the economic and financial fallout.
- However, the central government’s response, so far, has been limited.
- India has one of the strictest lockdowns in the world with one of the thinnest covers of social protection.
- The first government package aimed at ensuring a steady supply of food grains and easing of cash woes of vulnerable sections.
- But with investment activity and exports expected to remain depressed, and the economy likely to be largely reliant on government spending and restricted household consumption, more fiscal support is needed.
- The combination of a sharp slowdown in growth and government tax revenues will itself push up the fiscal deficit beyond what has been pegged to maintain current levels of spending.
- Add to this the requirement to support the economy and the deficit will widen further.
- The severity of the slowdown necessitates more government support.
- In fact, government spending may well have to be front-loaded. Sectors which have been hit the hardest such as MSMEs, airlines, hotels, exports will have to be provided relief.
- Failure to do so will result in job losses, and a rise in bankruptcies, throttling the financial system, making even a gradual recovery more difficult.
- The Centre may want to keep the power dry for the “unknowns” that may yet arise, and may favour opting for several rounds of measures, calibrating its response as the situation unfolds.
- But it is also necessary for it to spell out a broad strategy on how it intends to support the economy.