What Should be Done for our Economy to Chart a Recovery

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.