September 22, 2020
Rescuing the Economy
By Nitin Desai
RESCUING THE ECONOMY
To rescue the economy, ensure price support for agriculture, subsidise wage costs of MSMEs and accelerate public construction activities.
The National Accounts for the first quarter of this financial year suggest that the fall in GDP this year will be probably be of the order of 10% or even more if the current surge in Covid infections is not contained soon. The revival of the growth process will not take place until the second half of the next financial year and this delay can lead to social unrest caused by unemployment and rising poverty and a significant erosion of domestic and foreign investor sentiment.
Here is an area where the government needs to articulate a credible policy focused on measures for economic revival that can have an immediate impact. What we have had so far are spectacular announcements about long-term development issues without recognising that these issues will languish unless the immediate short-term challenge of rehabilitating the economy and restoring the growth process is taken in hand.
The macro-economic policy required for this has been extensively discussed and there is a general consensus that we need a fiscal stimulus amounting to at least 5 per cent of GDP. But what we have had so far amounts to less than 1 per cent of GDP. It is true that a much larger fiscal deficit will mean backtracking to automatic monetisation and the associated risk of inflation. But that is less of a problem than the risks of persistent stagnation and decline in the economy.
The Government’s fiscal conservatism seems to be directed at keeping rating agencies satisfied, in the belief that this is necessary to attract foreign investment. It must understand that foreign investors are interested in the Indian market and the decline and stagnation in growth will put them off far more than any fiscal profligacy.
The Finance Ministry must be ready to run a much larger deficit and provide money for what is necessary to rescue the economy and workers from the impending threat of a deep recession. The fiscal largesse must be directed at the sectors which hold out the promise of immediately stimulating the investment and growth process and at the same time helping sectors facing the prospect of collapse.
The first quarter GVA figures at current prices give some signals on what these could be. Trade, transport, hotels and communication, which are labour intensive service sectors, with a large proportion of employment being informal, account for about 41.4 per cent of the decline in GVA in the first quarter of 20-21, manufacturing and mining accounts for about 34.3 percent and construction for 19.5 per cent. The remaining part of the decline is accounted for by sectors with a larger proportion of formal employment, with a 8.5 per cent decline in financial, professional, real estate, public administration, defence and other services and a modest 0.7 per cent decline in electricity and utilities.
The agricultural sector departed from the trend and grew by 4.4 per cent in current prices and the prospects for this year look even better. The end-August estimate from the Ministry of Agriculture shows that the area under kharif crops has increased by 7.2 per cent, with an increase of 10 per cent in the area under rice, 13 per cent in the area under oilseeds and 4.6 per cent in the area under pulses. There have been newspaper stories suggesting that one reason for this is that urban workers who lost their job and returned to their village decided to cultivate their land which had been lying fallow while they were away.
The crop output will be determined not just by the acreage but also by the weather. As of mid September the number of districts with normal rainfall (49%) is better than at the equivalent time in four of the previous five years and more or less equal to that in 2016. However the percentage of districts with excess rainfall (28%) is higher than in any of the previous five years. Some agricultural experts have argued that the combination of low rainfall in July and very heavy rainfall in August is not good for many khalif crop. But, even allowing for this we are going to see bumper crops coming to the market soon in October/November.
Bumper crops do not necessarily mean bumper incomes if agricultural prices crash. The Government has announced a major initiative to reform agricultural marketing. But that will take time to take effect and is already attracting farmer protests. Hence the government must deploy substantial resources to procure and provide price support not just for rice but for other crops for which MSPs have been announced. If this is done, judging by the acreage increase and the good monsoon, we could see a an increase in nominal rural incomes of the order of 10 per cent. This will give a demand boost that will be a godsend for local MSMEs and for larger corporates in sectors like consumer goods, agricultural machinery, construction materials and so on.
Now to turn to the severely affected sectors like trade, hotels, etc. They have been hit by the lockdown which now needs to be phased out. But that by itself will not be enough. A more vigorous effort to provide quick short term stimulus to urban incomes is required.
A study done by some researchers at LSE, drawing on a survey carried out between May and July 2020, shows that 21.7 per cent of young urban workers were made unemployed or had worked zero hours in the week before they were surveyed. Altogether, 52 per cent of urban workers went without work, pay or financial assistance in the three months following the start of the lockdown. Labour incomes fell by 48 per cent between January-February and April-May 2020. The Government should make up for this loss by picking up a large part of the wage tab of urban MSMEs for, say, six months. This will revive urban demand and add to the stimulus from the rural revival. More than that it will rescue MSMEs from the risk of closure and thus provide a further demand boost.
Once there is a demand boost, organised manufacturing, mining and services will pick up. The construction sector may need support in the form of an accelerated programme of road construction and other construction intensive public investments.
Thus the answer for a quicker boost to growth is simple - run a much larger deficit, use the resulting public resources to ensure adequate price support for agriculture, subsidise wage costs of MSMEs and accelerate public sector construction intensive activities. The resulting demand boost will lead to a growth and investment revival and rescue the economy.