Source: Indian Express
Syllabus: GS3: Mobilization of Resources, Growth, Development and Employment.
Context: India needs to focus on rebuild and recover to achieve economic growth of 7-8 per cent.
Need to address some traditional sore points:
- Pandemic impact: Indian economy is suffering due to the pandemic with declining growth and limited scope for a fiscal stimulus.
- Demand-supply issue: India’s slowdown is largely a structural demand problem that cannot be addressed through piecemeal aid and transfers.
- Contrast in GDP growth:
- First phase- when growth was driven by domestic investment and global growth.
- Second phase- the post-global financial crisis stimulus phase.
- Third phase- the leveraged consumption phase. The economy is estimated to have lost around Rs 20-28 trillion due to a lockdown, with FY2021 growth likely to be around (-) 11.5 per cent.
- Focus on demand side: Consumption led growth provides limited scope for a sharp recovery over the medium term without exogenous (and often unsustainable) triggers.
- To prioritise long term growth: broaden the consumer base by empowering the low and middle-income consumers rather than pushing consumption itself.
- To protect India’s labour market: If the pandemic results in a prolonged retrenchment of the workforce, it will deepen faultiness in labour market.
- Uncertainty and savings: temporary incomes coupled with income uncertainty will induce precautionary savings without any impact on growth.
- Poor social security: The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category. However, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract. Since most of the workers are informal employee, consumption-led growth in the aftermath of a crisis become a substantial risk.
Steps that should be taken to reform, recovery and rebuild:
- Increase public borrowing: since revenues have cratered, funding of additional expenditure should be done through higher borrowing. public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare and educational facilities to help rebuild the economy
- Set up a Development Financing Institution, and an asset monetisation programme.
- Increase sustainable investment: debt should be seen in the context of future investments being hampered due to current consumption.
- Streamline processes for quick approvals and ensure timely payments to private operators.
- Fiscal prudence: India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. These metrics will take quite a few years to revert to pre-COVID levels and rapid consolidation will adversely impact growth.
- Any kind of “stimulus” should be well-targeted and have a large multiplier effect.
- Creating steady and well-paid employment for the bottom and middle segments: to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
- Inclusive growth: focus on infrastructure and manufacturing as the PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce and 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
- Make manufacturing easier: the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
India needs to address traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles to protect a decade of favourable demographics.