What is the state of economy?
- The OECD expects the world economy to shrink by as much as 7.6 per cent in 2020. India’s full-year economic contraction is estimated between 9 and 12.5 per cent.
- The pandemic has severely impacted both demand and supply.
- With two years of slowdown the balance sheet of both the government and the industry has already strained.
- The banking system is in deep distress to support growth.
- All the four engines of growth (Private consumption, Exports, domestic consumption, government spending) are declining.
- The pandemic has forced most central banks and the governments to announce large stimulus to ensure rapid post-Covid recovery.
What were the steps taken by government to revive the economy?
- Tight fisted approach: The government has chosen structural reforms and debt support, rather than offering large scale stimulus to revive the economy or a GST rate-cut, to revive economic growth.
- Agri-reforms: It has brought in agriculture reforms to boost the farm sector growth.
- Conditional Loans: It has allowed the cash-strapped States, to borrow more but on conditional basis. For example, undertaking reforms like ending free power to farmers.
Why government is not resorting to Fiscal stimulus?
- The stimulus offered so far is just 1.2 per cent of GDP whereas Japan’s stimulus stands at 21.1 per cent of GDP and US’ at 13.2 per cent.
- The government strongly believes of a V-shaped recovery is in progress but it is unclear whether this recovery will sustain.
- The government is worried that any fiscal stimulus if provided will have same impact that of the 2008 stimulus which caused sustained inflation.
What is the way forward?
- It is clear that without a strong stimulus, the recovery will be slow.
- Only a sustained increase in demand will push the industry to start investing again.
- If that happens, three of the four engines of growth will fire (public consumption, private investment and government spending) causing economic growth to return.