The Pandemic and the Slowdown

  Empowering people is the right way out of the economic crisis

The Indian economy had already entered a period of slowdown before the corona virus crisis hit the market. There were clear indications of a slowdown gripping the economy just before the pandemic started showing impacts. This was the third occurrence of an economic slowdown for India in the past decade after those that began in June 2008 and March 2011. In technical term it would be called growth recession. Generally three subsequent quarters of contraction in GDP is called recession in an economy. But since India is a large developing country contraction is nothing uncommon. A growth recession is generally observed when the economy continues to grow but at a slower pace than the usual for a prolonged period, much like what India has been facing nowadays. India’s growth rate has dropped to 5% in the first quarter of Financial Year 2020, the lowest in over six years. In the words of economist Raj Krishna the growth rate is becoming Hindu, a clear analogy to the pre- liberalization period. Putting things into perspective we can say this slowdown has been brought forward by the lack of awareness of the central government.

Lack of employment in the economy in spite of the government’s repeated claim of generating employment and lack of money in the hands of the people has contributed to the lack of demand that has brought doom for many industries like cars and biscuits. Added to this, the effects of demonetization have caused many small businesses trouble and the GST -related problem has created a severe crisis in the market. A new study indicates that effects of demonetization and GST have cut jobs by 2-3% points to slow down the economy. Earlier the growth of the Indian economy has been characterized by consumer expenditure inclusive of both private final consumer expenditure as well as the government final consumer expenditure. Over the last five years the total consumer expenditure by Indian households has accelerated with average growth rate of 7.8% compared to average of 6.1% in 2011-14. But recent sharp fall in Private Final Consumer Expenditure in the June quarter to 3.1% compared to 7.2% in March quarter clearly signifies the slowdown. Be it the recent slowdown in the auto sector or the rising number of nonperforming assets (NPAs), halting consumer demand or faltering manufacturing sector, all have added to this slump in the economy. The crisis developing within Indian economy has gained unanimous acceptance by now. Indications of tougher times were ahead as government started cutting corporate taxes.

Since the corona virus crisis hit the globe, the prolonged lockdowns all over the country have brought business activities to a halt and the financial condition of a large number of people has deteriorated a lot. As the nation is coming out of lockdown in a phased manner and the employment graph is showing some prospect, it needs to be said that there should be cautious steps in resource mobilization to help as many people as possible. Already however India has suffered a lot more economically for the lockdown than have many countries in which covid-19   pervaded earlier. In March alone approximate 140 million workers were estimated to have lost their jobs shooting the unemployment rate from 8% to an unparalleled 26% nationwide. Some 10-80million migrants comprising of street hawkers, labourers and factory workers have desperately tried to return to their native places battling not only fatigue and hunger but police atrocities. Millions more working abroad have either cut back on their remittances or plan to come back home. The 10% of workforce in formal employment has been better off but this is partly because the employers have kept them in jobs in spite of all adversities. Goldman Sachs, a bank expects the Indian economy to contract by 45% this quarter at an annualized rate and by 5% over the full year. The National Council of Applied Economic Research (NCAER), a think tank based in Delhi predicts a contraction of 12.5% this fiscal year unless there is huge stimulus.

 To fight the tough times ahead, Narendra Modi, the PM on May 12^th announced a fabulous amount of 20 lakh crore rupees of fresh government spending equivalent to 10% of GDP to revamp growth. Although this extra spending is supposed to push the budget deficits of the central government and the states to about 12% of GDP and raise the country’s overall debt –to- GDP ratio to 80%, the viability of the strategy is still in question. Huge amount of money for the circulation and emergency cash support for the poor was the need of the hour, but instead of demand side boost Modi devised a mix of supply side stimulus such as credit guarantees along with reforms whose effect will not be reaped in the short term. Major portion of the stimulus was comprised either of previously announced measures or centre backed moves to enhance lending activities. Estimated amount of the actual new fiscal commitment by Modi’s government ranges from 0.7% of GDP to 1.3% which is much lower than the projected 10%. Instead of giving the poor cash support it will make easier for small firms that employ most Indians and form the backbone of economy to borrow and invest. Government has also increased spending on rural jobs programmes like NREGS, a move that Modi criticized vehemently as an opposition..

In recent times not only leftists but India’s Nobel laureates Amartya Sen and Abhijit Banerjee have advocated monthly emergency payments of up to $100 for poor families. Politicians like Rahul Gandhi  have also voiced similar demands of transferring money to the people. The 20 lakh crore stimulus that the central government has announced mainly consists of  loans for poor people  small farms. There is no plan to give money to the people so that they can become entitled in the market.

The centre has instead offered $6.60 each a month for 200 million poor women and promised a one off $26 apiece to 70 million farmers. Such an amount is insufficient even for the 60% Indian who survive for less than $3.20 a day, the World Bank’s poverty line for lower middle income countries. There remains much less scope for stimulating demand to generate jobs. An enormous amount of bad debt was weighing on investment and spending before the virus outbreak. Yet the government and the central bank have been repeatedly encouraging lending. In a situation like the present, expecting bank loans to grow more rapidly is quite unjustified. The government has also emphasized on ‘Make in India’ scheme to boost home production during this crisis and grow self reliance in the home economy. But lack of direction is a problem in implementing the scheme. The situation that was vulnerable before the pandemic has become further grave in the last few months. Empowering the people would be the right decision if India hopes to come out of the economic crisis.