An Uneven Economic Recovery Requires Us To Focus On Demand

Livemint     2nd June 2021     Save    
QEP Pocket Notes

Context: While the second wave of the pandemic now seems to be receding, and the economic costs are estimated to remain lower than the last wave, there still remains related to low demand in the Indian economy.

Factors behind impressive economic recovery after the first wave: In September 2020

  • Increase in financial savings of households: Due to the harsh lockdown during the first wave.
  • One part of this was forced savings as people could not leave their homes.
  • The other part was precautionary savings in the face of huge economic uncertainty

Reasons for economic costs of Covid 2.0 likely to be lower than the first wave:

  • Less stringent lockdowns imposed by various state governments than national lockdown last year.
  • Companies, as well as governments, have now learnt how to manage operations during lockdowns.
  • Revival in economic activity in many other parts of the world can support exports even when domestic demand is weak.
  • Availability of vaccines offers hope to return to normalcy soon.

Issues faced by the Indian economy: Following poses a hurdle on economic recovery -

  • Recent economic recovery based on profits and not wages:
    • National income is the sum of the earnings of the main factors of production—labour, capital and land. The wages, profits and rent they earn give us an estimate of net national income.
    • Wages declined: As a result of job losses as well as a decline in incomes, the share of wages in the gross domestic product (GDP) fell by more than five percentage points, from 32.5% in the second quarter of 2019-20 to 27% in that quarter of 2020-21.
    • Corporate profits have risen: Strongly in 2020-21 because of a variety of factors, including lower-wage, interest and input costs.
  • Inadequacy of monetary policy: The initial response to the pandemic was dominated by monetary easing, regulatory forbearance and credit guarantees, which provided needed protection to the supply side. However, this would not help in increasing the required demand.

Way Forward:

  • Focus on raising private sector consumer demand:
    • The Reserve Bank of India has said that the experience with the Indian business cycle over the past 25 years shows that sustainable economic recoveries are usually led by private-sector demand rather than government spending.
    • Recoveries after crises have been led by private-sector consumer demand rather than private-sector investment demand (as it is only beneficial if it creates new jobs).
    • Much of the traditional industrial sector has excess capacity right now, so companies are likely to use their higher profits to repay debt rather than invest in new capacities.
  • Intensive fiscal policy measures: The government needs to focus its energies on public investment as well as some form of one-time income support.
    • A quick recovery in domestic demand should hopefully result in higher tax collections, which makes a temporary fiscal expansion less risky
QEP Pocket Notes