Context: Official acceptance that India’s gross domestic product (GDP) fell by 24% in the first quarter of 2020-21 opens the door for some rethinking.
Problems faced by the economy
Low demand – both consumption and investment
Low production
Lack of confidence among consumers: They may defer spending on non-essentials due to uncertainty about future
Low exports
Decline in growth is not a new normal:
India’s growth had slowed down before the COVID pandemic and was only 4.2% in 2019-20.
The McKinsey Global Institute (MGI), in a recent study, has argued that India needs to grow at 8-8.5% from 2022-23 onwards. We did grow at that rate for seven years between 2004-05 and 2010-11
Increase Expenditure
Increase expenditure component of the Stimulus package:
?20 trillion packages (10% of GDP) was announced of which the expenditure component was relatively small, most of it consisted of credit expansion and restructuring of loans.
The expenditure shall be increased on the following:
Programmes that support the poorest groups, which have suffered the most
Accelerating ongoing public investment projects in infrastructure
Should not decrease Expenditure on account of loss in tax revenue:
Tax revenues are likely to fall short by about 2.5% of GDP, so spending will increase Fiscal deficit, but it makes no sense to respond by cutting expenditures to preserve the fiscal deficit.
The higher fiscal deficit necessitated by short-term compulsions in the current year must be followed by bolder steps to achieve fiscal consolidation once normalcy is restored.
Reforms to be done
Privatization:
Increasing the role of the private sector in improving agricultural marketing
privatizing banks as well as reducing the government’s role in controlling public sector banks
Land reforms:
Making it easier for industrial and housing projects to acquire land
Offer surplus land with the public sector
Introduce greater flexibility in the labour market
Electricity Reforms
Privatizing electricity distribution
Eliminating the cross-subsidies in electricity tariffs that make electricity more expensive for the industry than for residential consumers
Encouraging an open trade environment with low tariffs and eliminating tariff inversion
Urban Reforms:
Increasing the floor space index in cities to allow expansion in housing and urban development
Amending rent laws to encourage the private supply of rented housing
Expanding public expenditure:
Increase expenditure component of the Stimulus package:
?20 trillion packages (10% of GDP) was announced of which the expenditure component was relatively small, most of it consisted of credit expansion and restructuring of loans
The expenditure shall be increased on the following:
Programmes that support the poorest groups, which have suffered the most
Accelerating ongoing public investment projects in infrastructure
Should not decrease Expenditure on account of loss in tax revenue:= Fiscal deficit can be tackled through fiscal consolidation once the situation normalizes.
Conclusion
Since Centre-state cooperation is essential for these reforms, the central government should outline a time-bound plan of action on what it proposes to do, invite suggestions on how it is best done, and then do it.
We can then leave it to competition to nudge states to do their bit,especially if early adapters see benefits. Thus competitive federalism could lead to cooperative federalism.