Dangers of misplaced optimism in economy

Context: The government’s economic recovery hype is no rights and this is not a time for fiscal conservatism.

What is current economic scenario?

  • India’s economy contracted by 7.5% in the second quarter of financial year 2020-21 was, both good and bad.
  • It is far lower than the 23.9% contraction registered in the first quarter of this financial year.
  • second-quarter contraction is high with most similarly placed countries.
  • Relaxation of lockdown restrictions during that quarter has not ensured automatic recovery.
What is government stance?
  • Based on the evidence, the Finance Ministry’s Monthly Economic Report, for November, speaks of a V-shaped recovery reflective of “the resilience and robustness of the Indian economy”.
Why slowdown in contraction is no sign of recovery?
  • Lockdown has affected employment, income and demand:
    • Now since lockdown are relaxed, production must rise, not just to meet demands backed by the available purchasing power but also to restore inventories to normal levels across the distribution chain.
    • Demand must return to and rise above pre-crisis levels for production to recover and grow.
  • Burden on economy: The lockdown increased indebtedness and the bankruptcies. Lockdown induced affects are to be felt well after restrictions are relaxed.
  • Decline in consumption: the decline in private final consumption expenditure at constant prices, which accounts for 56% of GDP, has come down but still remains high.
  • Lack of consumer confidence: net incomes and consumer confidence are not at levels that can even restore last year’s levels.
  • Less recovery in investment: the decline in fixed capital formation has fallen from a high minus 47% in the first quarter to minus 7% in the second, however, investment is still falling year-on-year.
  • Half-hearted stimulus: Government Final Consumption Expenditure, which rose by 10% in the first half of 2019-20, relative to the corresponding period of the previous year, declined by 4% in the first half of 2020-21.
What government should do?
  • Shun fiscal conservatism: Lockdowns limit production and result in a rundown of inventories.
  • Government’s responsibility: the tasks of providing safety nets, reviving employment and spurring demand become crucial. The market cannot deliver on those fronts that is why state action facilitated by substantially enhanced expenditure is crucial.
  • Increase borrowing: since government revenues shrink during a recession expenditure need to be funded by borrowing.
  • GDP movements: need to understand the dynamic of the post-COVID-19 economy.
  • Increase allocations for welfare expenditures: for example, subsidised food to minimal guaranteed employment.
What are the impacts on States?
  • Squeezing expenditure at the State level: As per Office of the Controller General of Accounts, the total expenditure of the central government stood at 55% of what was provided for in the Budget for 2020-21, which was woefully inadequate even for normal times.
  • Shortfall in spending: The shortfall in spending was sharper in the case of capital expenditure, with 48% of that budgeted being spent over April to October. The corresponding figure for 2019-20 was 60%.
  • Fall in GST revenues: the government has decided not to compensate for the shortfall, as promised under the GST regime.
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