THE POST-COVID ECONOMY by NITIN DESAI

The Indian economy has clearly fallen behind by several years if one looks at the GDP numbers, the sectoral value added in manufacturing and construction or the actual off take of items like electricity, steel and cement, vehicles and so on. How can this be corrected, and growth revived in the post-Covid economy?

The principal means for reviving the economy over the next few months has to be a significant boost in demand growth. Investment is a derived demand and it will not rise till final demand rises. The recent revival of export growth will help but will not be sufficient. The scope for demand growth from higher public spending on direct income transfers and higher public investment is constrained by a rather tight macroeconomic situation as India’s Debt/GDP ratio rose sharply form 74 percent at the end of 2019 to 90 percent at the end of 2020.

Hence, we need to understand what lies behind the present state of consumer demand and how it can be revived quickly. Private Final Consumption Expenditure (PFCE) in 20-21 at constant prices was Rs 75 trillion, which is just Rs 1 trillion more than its level two years earlier in 2017-18. The same is true for Gross Fixed Capital Formation (GFCF)- Rs. 42 trillion in 20-21 which also is just Rs.1 trillion more than the level in 2017-18. Moreover, in the case of GFCF, when the released national accounts separate the pubic and private components, the latter will probably show a decline.

The impact of the COVID epidemic and the response in the form of lockdowns has reduced household incomes and restrained consumer demand. One indicator of this is the loss of employment. The widely used employment data from the Centre for the Monitoring of the Indian Economy (CMIE) showed a massive increase in unemployment in April-May 2020.

The data on employment in MGNREGA shows a similar large jump in April May 2020 and a lowering since then. A measure of the rural distress because of the forced return of migrant workers from urban areas is reflected in the MGNREGA employment data for 2020-21 which shows an increase of 47 percent on the 2019-20 level. A recent research report suggests that the severe lockdown at this time and the associated movement of about 10 million migrant workers pushed below the poverty line an additional 75 million people (26.3 million in agriculture, 16.7 million in manufacturing, 23.6 million in construction and transport and 8.7 million in other services).

Children from poorer families have suffered a severe loss education and nutrition with the loss of midday meals for over a year. Employment and presumably household incomes recovered since then till the second wave of the epidemic came in April 2021. The situation changed abruptly.

The CMIE data for April-May 2021 show a rise in unemployment that, though less than the same period last year, is still quite substantial. The CMIE survey data also show a large drop in consumer sentiment during the second wave with the index dropping from an average of about 54 during the first quarter of this year, when the COVID situation seemed to be getting under control to about 47 by May 2021. There is some monetary evidence that households are holding back consumption spending and accumulating monetary assets.

According to RBI data the net accumulation of financial assets by households in 2020-21 was way above the levels in the previous year. The cash held by the public had gone up to 14.6 percent of GDP, the highest level in the past 50 years and the velocity of money (GDP/cash plus demand deposits) had come down to 4.09, the lowest level in the past 50 years. Why are people holding back spending and hoarding money?

One part of the explanation surely is the lower opportunity for spending because the lockdown and the restrictions thereafter restricted travel, vacationing and even mall and market-based shopping. However, the continuing hesitation to spend suggests something more. People have been driven into a panic by the second wave particularly when the public health system nearly collapsed leading to deaths because of the shortage of oxygen, hospital beds and so on. The epidemic spreading to areas with poor health services may have added greatly to this panic.

Perhaps people who have lost faith in the ability of the public health system to protect them are holding back their money for a future emergency similar to what we saw in April-May 2021. Perhaps migrant workers are saving to provide for some future lockdown. If this conjecture is right, then the most important thing the Government can do to persuade households to spend is to restore confidence in the public health system and in support systems for unorganised sector workers.

That more than sops for producers may be more effective as a booster for the economy. In fact, there is a stronger case for the Government shifting its attention from economic management to public service management.

The latest National Family Health Survey (NFHS) shows a significant deterioration in the proportion of stunted children. The Annual Status of Education Report (ASER) continues to show the poor outcomes of schooling. The great divide between the rentiers who have inherited wealth, the owners and managers of corporations, the educated and high-skilled elite work force and the 80 percent of the population who constitute the rest is growing. Health, education, poverty, employment and environment surveys should provide the real metric of progress rather than stock market indices and GDP growth. When it comes to economic policy the Government should set up a sensible, stable and predictable structure of taxes, tariffs and regulations and leave the rest to the market.

The primary task of Government should be to boost the quality and reliability of public services for health and education, provide credible social protection to low-income households, particularly the wage labourers at the lower end of the income spectrum and limit its sectoral interventions in the rest of the economy to countering externalities like environmental deterioration arising from private activities.