What Should be Done for our Economy to Chart a Recovery

Livemint     7th September 2020     Save    

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.