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.
• 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.
• 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.
• 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.
• 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.