Green shoots in our economy: Are they real and sustainable?

Context: Some indicators suggest a recovery, but it's premature to confirm one, and pre-COVID structural constraints still need easing.

Recovering Economic Activity in India:

• Agricultural Sector: Record increase in the Kharif crop season due to a bountiful monsoon; increasing purchasing power in the hands of farmers is expected to increase rural demand.
• Manufacturing Sector: The manufacturing Purchasing Managers' Index (PMI) at 58.9 in October marks the fastest output increase in 13 years, and the core sector growth has shrunk by just 0.8% in October.
• Services Sector: The services PMI has touched 54.1 in October, compared to 49.8 the previous month.
• Increasing demand:
• Passenger vehicle sales increased sharply with Maruti Suzuki recording 19% sales growth.
• Rise in Goods and Services Tax: representing the consumption of taxed goods and services, reached ?1.05 trillion in October, an increase of 10% year on year.
• The strong rebound in exports in September has created a current account surplus.
• Increased consumption of petroleum products and higher electricity generation.
• Rising Foreign Direct Investment (FDI): From April to August this year, it was a record $35 billion.
• Rising Confidence levels: The continuous improvement in Reserve Bank of India's (RBI) indices on consumption and business sentiment for next year too.
• Resurging Logistics Sector: Railway freight movement recorded an increase of 15%.

Challenges to Recovery:

• Continuing pandemic: may restrict recovery in certain sectors like hospitality and tourism.
• Structural factors:
• Pre-COVID economic decline: From 8% to 3.1% of the Gross Domestic Product (GDP), while the Investment declined from 30% of GDP to26%.
• Balance sheet crisis: due to a sharp slowdown in investment activity due to weak, crisis-struck corporates, banks as well as the government.
• Inadequate investments: Companies were not willing to borrow and lenders unwilling to lend, while the government does not have the fiscal space to provide worthwhile stimulus.

Steps taken by the government:

• Undertaken reforms: in the farm sector and sought to deliver labour market flexibility.
• Fiscal stimulus: in the form of liquidity support, restructuring of loans and regulatory forbearance, along with rate cuts, have been helpful in enabling Micro, Small and Medium enterprises to remain afloat.
• Introduction of e-invoicing: for businesses with revenues above ?500 crores could also have been a factor in increasing the GST collections.

Way Forward:

• Clear all pending bills of contractors and provide additional fiscal stimulus.
• Stabilizing e-invoicing system: which will help improve tax compliance, and timely monitoring of input-tax credit claims will improve compliance.
• Rationalization of taxes: Reducing tax rates on construction materials from 28% to a lower rate would help revive the labour-intensive construction and automobile sector.
  • Develop a three-rate structure: Comprising general rate, merit rate and sin rate.