Current State of Indian Economy
As per International Monetary Fund (IMF), the world is likely to experience the worst recession by 3% since 1930s. The global economy will suffer the worst financial crisis as the globe is grappling with COVID 19 pandemic. The issues occurring in global economy will have effect on India’s economy also. India’s fiscal relationship with China as well as the rest of the world will massively affect India’s GDP growth rate, trade, import/export. India’s dream of becoming $5 Trillion-dollar economy by 20205 will also be hampered. In India, the exports have refused to pick up, rupee has depreciated, foreign exchange are drying and industrial activity is at hault. If we look at the unemployment figures, then it remains at 24% which is among the highest till date. (Source: Centre for Monitoring Indian Economy). The credit rating agencies have reduced the GDP forecast figures for India. MOODY’s declined the country’s GDP development from 2.5% to 0.2% for financial yea2 2021. FITCH, another credit rating agency has cut down its projection from 5.1% to 2%. India has also witnessed a sharp decline in the index of industrial production which has reduced to 16.7%.
Looking at the sectors individually, we can say that sectors like – hospitality, aviation, automobile, real estate and MSME have been worst hit. According to CARE, the Agriculture sector, Pharma sector and Telecommunication sector would do well because of the government support (economic packages) and having an opportunity of receiving large investments due to the “essential good” characteristic which they hold. Furthermore, due to the economic package and increase government expenditure, India’s fiscal deficit would rise. The deficit can go up to 5-7% as against the 3.5% which was predicted earlier. CARE rating claims that the fiscal deficit would rise primarily due to “Revenue Shortage”. Currently, not more than 20% GST is being collected in India, companies are incurring losses due to which there would be low or no tax collection. An increase in unemployment would mean no income being earned by an individual which in turn would mean no income tax collection. Decrease in foreign trade has lead to negligible custom collection. This clearly explains how the government would witness the issue of “Revenue Shortage” would give rise to high fiscal deficits.
With an easy credit and borrowing opportunity, there is a higher probability that the Non-Performing Assets (NPA) would also increase. Indian Economy is currently facing the “3L –Labour, Logistic and Liquidity Challenges” with respect to supply chain and production. We are uncertain as to how and when the migrant labours would return back from their villages to cities for the commencement of their jobs.
Evaluation of Recent Measures
On March 26 Finance Minister Nirmala Sitharaman reported a 23$ billion bundles planned for padding this economic disturbance and financially aiding the poor. The Reserve Bank of India joined the battle a day later with sharp interest rate cuts ad a number of measures planned for making credit accessible for ambushed organization. However, $23 billion package was only 0.5% of India’s GDP. This scheme had been criticized for being just another amalgamation of other schemes. Recently the government launched an “Economic Stimulus Package”. Compared to 0.5% of the GDP size, this package’s size is 10% of the GDP. The main focus of this scheme is on self- reliance. The package has been divided in five tranches.
The first tranche focused on small business and MSMEs. The FM has announced collateral free loan of 3 Lakh Crore for 45 lakh unit of MSME. In India, there are 6.3 cr MSME units, what about the remaining 5.8 cr MSME units? If we analyze it carefully, then we can see that the central bank has not actually put in the money from their side, instead they have shifted the burden on the commercial banks. The policy related to EPF deduction, has no doubt increased the take home salary so that demand- spending increases, but it would dent the overall saving as the extra income earned would be lost by paying the income tax.
For migrant workers, there is a provision of 5 Kg of food grains per person and 1kg of channa per family for two months. The government could have extended the PDS coverage to include more people who are suffering from job loss and livelihood disruption. Other policies include- affordable rental housing complexes under PMAY, interest subvention worth 1500 crore for MUDRA SHISHU loan, concessional credit for PM Kisan beneficiaries. My analysis is that many of the announcements are a combination of liquidity and credit easing measure or in another word an extension to an existing scheme. The only fiscal measure is the direct supply of food grains that the migrant workers are getting. The policies related to agriculture sector are decent enough for the sectoral revival. Good decisions by the government with respect to agriculture include – amendment of essential commodity act, facilitation of inter intra trade and provision of legal framework of contract farming. I have been most impressed by the policy action pertaining to education and health. Both sectors expenditure figures have been increased. For the goal of self-reliance, the merging of public and private sector policy is great. However, the only concern is the implementation of the actions which are decided by the government for these two sectors.
Way Forward
We can call this stimulus package as an economic package and NOT a relief package. It could be called a relief package only if the government had infused real money or did direct cashtransfers to its citizen accounts. Since the government has not put in money, it acts as a guarantee to the banks which are basically providing easy money to the public. According to economist Amit Mitra, the stimulus package includes only 2% of GDP which could beaccounted as a direct cash transfer policy as against the 10% of GDP package. He says most policies include banking activities and not cash transfer to specific people. We should follow a more direct and specific approach like the western countries, where they are providing money directly to the people. To bring back the supply chain, fiscal stimulation should be inherited rather than the monetary stimulation. Currently, all are budgetary reforms where the outcome would be seen in long term, we need a solution so that the effect could be seen immediately.
The government should also focus on the urban employment guarantee program or introduce a policy which would focus on the coverage of employee cost so that the employers or firms do not lay off their employees. If direct cash and food transfer is given to the people, not just who are registered with the government but to those whose life has been displaced then the economic gloom can be fought and the demand could be boosted assuming timely implementation of the policies.
Author: Rishabh Mukerjee
Bachelor Of Arts (B.A) Honours, Economics, Shaheed Bhagat Singh College
Master Of Science – MS, Applied Economics & Management, Cornell University