HomeSpotlightReviving the COVID inflicted economy

Reviving the COVID inflicted economy

Reviving an economy which was in ‘statue mode’ for nearly two months would be the last thing a Finance Minister would like to do in his/her political career as it needs lot of balancing acts. The task was exacerbated by an economy which was already showing signs of fatigue even before the outbreak of pandemic in the country. A balance had to be struck between the ever growing number of COVID patients and increasing demand of the industries to allow them to start operations and also between long line of migrant workers returning to home towns and deteriorating condition of the economy. Sections of the economy and people needed saline to get back to work and the government had to provide the same without damaging much the fiscal condition.

India was staring at sovereign rating cut to junk status with some of the rating agencies going public with a mild threat. Had it happened, it would have also increased the borrowing cost of the private sector and would have had an impact on the rupee value too which already is facing pressure in the forex market.

Tackling the issue of demand slowdown

One of the real problems being faced by the economy is that of demand slowdown which is expected to continue due to uncertainties surrounding us. Most of those employed are facing the threat of either job loss or salary cut both are bad for demand generation. Reverse migration of migrant workers is likely to create situation of unemployment, under employment and disguised unemployment in rural areas. So, the primary task of the government needs to be to tackle this situation. In the absence of any stimulus, demand recovery would be painstakingly slow. Most of the measures till date taken by the government are to address supply side issues and thereby completely ignoring demand side challenges.

Rural Demand to pick up much faster

According to a CMIE survey, the number of farmers has gone up by 27.5% since September 2016, that is, just before the announcement of demonetisation and this ratio is expected to rise significantly now due to reverse migration of the workers. This implies that there would be heavy dependency on income form the same farm and on MNREGA. Fortunately, third tranche of the Atmanirbhar package has focused on agriculture sector reforms. A financing facility worth Rs1tn will be provided by NABARD for funding agri infrastructure projects at farm-gate levels and at aggregation points. Also, remember that the number of farmers claiming PM-Kisan increased by nearly 10mn in the fifth instalment. This might also increase the states’ income support outlay. This number might rise going forward, if the workers lose their job, could not afford urban living due to loss in income for two months, temporary displacement, etc.

The government has also allocated Rs200bn marine & fishery, Rs150bn dairy, Rs40bn herbal, etc. High investment in these sectors would be lucrative in the long run to generate employment and improve exports. Once the migration issue is sorted, the MNREGA demand is likely to be way higher. With a hike in wages and rising population in rural areas, don’t be surprised if the rural economy takes the lead in reviving the whole economy.

Fiscal deficit likely to be in double digits

The Finance Minister in her last budget projected a fiscal deficit of 3.5% of the GDP which is likely to be exceeded due to various reasons like stimulus package and fall in GDP and revenue of the government. With revised gross borrowing of Rs12tn, the centre’s fiscal deficit is likely to hit 7.5% of GDP. In addition to this, there is likely to be slippages by the states too which may add another 4% deficit. Economists expect economic recovery to be slow and fiscal slippages may be seen in next year too. Therefore, efforts should be made to get back to normal fiscal health at the earliest.

Reforms will yield results in long term

Some of the reform measures announced both in agriculture sector and mining, defence, etc won’t yield results immediately but would only have impact in medium and long terms. But they go a long way in telling the intention of the government of using the ongoing crisis to plough through structural reforms that have been in the pipeline for a long time.  Overall, these measures reflect the government’s reform commitment and aim to improve India’s medium-term growth potential.

Stimulus package announced by India is smaller than other emerging markets and much more smaller than that of the advanced countries. Having announced the package, ball is now in the hands of RBI and the PSU banks to implement the package.  Banks have to act faster now as the busy season is fast approaching to an end. Further, we can drag on with COVID for some more time but living with slowdown is next to impossible.

Subscribe to our newsletter

To be updated with all the latest news from Sawdust




latest news