Context: GoI must augment expenditure and transfer cash to the poor to get over this ‘demand shock’.
Factors leading to demand shock in Indian economy
Pre-pandemic economic slowdown: Growth rate of the economy has been on a decline since Q1 2018-19, and 2020-21 ended with negative growth of (–)7.3% (See Graph 1, source NSO data).
Stagnant private consumption: Private consumption contributes a major chunk of GDP, and stagnant private consumption during recession indicating people are consuming less (See Graph 2).
A fall in per-capita income: Most Indians have become poorer. They are poorer today than they were three years ago (2017-18) (See Graph 3).
Precarious state of employment: Recent Centre for Monitoring Indian Economy (CMIE) data has pointed to a loss of 2.2 crore jobs in April and May 2021.
Unemployment rate that was 5.48% in June 2018 has once again spiked to 11.86%.
Falling Labour Force Participation Rate from 42.87% in June 2018 to 40.40% in March 2021.
Rising poverty: According to the study ‘State of Working India 2021’ by Azim Premji University, 23 crore people have gone below the poverty line, and average household borrowing has increased.
Way forward
Focus on the basics: Which includes:
A strong fiscal stimulus and fiscal expansion.
Cash transfers to the poor.
Liberal distribution of free rations.
Universal free vaccination.
Substantial help to MSMEs, including capital grants, interest-free loans, moratoria, debt forgiveness, etc.
Redesign a meaningful ‘stimulus package’: GoI must augment expenditure by using its cash surplus parked with RBI, borrowing more and, if necessary, monetising part of the deficit by printing money.
The sovereign power to create money must be exercised during a national calamity.