[Editorial Analysis] India’s new deal moment

Mains Paper 3: Economy
Prelims level: K-shaped recovery
Mains level: Changes in industrial policy and their effects on industrial growth. Infrastructure: Energy, Ports, Roads, Airports, Railways etc. Investment models.

Context:

• India’s faster-than-expected rebound is very encouraging. But given labour market pressures and prospects of a K-shaped recovery around the world, the economy will need to be carefully nurtured and stoked.

Forces that need to be disentangled for economic recovery:

• COVID Vs Economic Mobility: India has broken the link between COVID virus proliferation and mobility earlier and more successfully.

• Recovery Vs labour market: CMIE’s labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels. The employment rate gradually improved till September but has weakened since then.

• Large firms Vs smaller firms: The large firms have endured the crisis better and are gaining market share at the expense of smaller firms. To the extent there is a migration of activity from the informal/SME firms to larger firms, tax collections and Sensex/Nifty earnings should get a boost, even holding the economic pie constant.

• Productivity Vs pricing power: Greater scale and formalisation undoubtedly augur well for medium-term productivity but could increase near-term labour market frictions and boost pricing power.

Is K-shaped recovery from COVID?

• Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing “fuel in the tank” to drive future consumption.

• Households at the bottom are likely to have witnessed permanent hits to jobs and incomes.

Consumption pattern:

• Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent.

• With the top 10 per cent of India’s households responsible for 25-30 per cent of total consumption, Consumption would get a boost as this pent-up demand expresses itself.

• Upper-income households have benefitted from higher savings for two quarters. But not same for lower –income households because of jobs and wage cuts.

• Effective income transfer from the poor to the rich, this will be consumption and demand-impeding in the steady state.

• COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor.

Policy suggestion:

• Need to look beyond the next few quarters and anticipate the state of the macro economy post the sugar rush, for wellbeing of poor citizen and increase its income level.

• Policy will look for the private sector starts re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labour-market hysteresis could sustain with manufacturing and service sector.

• Ensure exports should benefit from strengthening global growth as the world gets progressively vaccinated.

• Private investment revival policy may be implemented first for recovery private sector.

• Government may invest in large physical and social (health and education) infrastructure push. It may provide job for who loss job due to COVID. It may reduce inequalities.

• Credible medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.

• Investment modal for public investment must be balance to push and financed by aggressive asset sales (strategic sales, disinvestment, and land and infrastructure monetisation).

How to achieve full recovery?

• We need to aspire to grow 10 per cent for three years, which is what will get us back to our 5 per cent trend line of growth by 2024.

• The most immediate fiscal stimulus possible is to put cash into the economy.

• Distribute the pending tax refunds, pay the bills of all companies, pay off the arbitration awards pending where the government has lost cases.

• Pay state governments their pending GST dues and state share of tax according to 14th finance commission.

• Centre should finance state government efforts to build an extensive public health network so we are equipped to handle a possible second wave of the virus.

• Government should work in partnership with private sector hospitals.

• The 20 trillion infrastructure pipeline needs to have some cash flow in it.

• We can put in place the right public-private programme to provide decent, accessible housing, with quick and cheap connectivity into our cities.

Way forward:

• The policy paradigm must mainstream affordable, accessible and green infrastructure standards, while promoting social equality and environmental sustainability principles.

• As the crisis unfolded, major global finance authorities, including the ADB, World Bank and the International Monetary Fund, to help country and adjusted their forecasts to reflect a smaller contraction in 2020 followed by a sharp rebound in 2021.

• India must urgently transform its economy to get to green frontier. The economy must be competitive as well as sustainable.

Subscribe to Get Weekly updates

Get daily current affair video, detailed current affairs PPT for quick revision and Free One Liner PDF directly in your inbox. Subscribe now to get this month's one liner for FREE.