Smell the GDP numbers

The Economic Times     1st June 2020     Save    

Context: Sharp fall in the latest growth estimates is a wake-up call to government to ramp up its stimulus package 

State of the economy:

  • Pre-pandemic decline: noticed through GDP growth of only 4.2% in FY2019-20. It is a sombre warning for how the rest of the current fiscal is likely to unfold. 
  • Contraction in economic activity: Observed in high frequency economic indicators including core sector output (fell by 38%). 
  • The 13 remaining hotspot cities are main centers of economic activity with inter-linked supply chains. This will further create distress
  • Labour shortage: due to continuous migration and lack of incentives to work in urban centres.
  • Decline in private consumption: which is the main driver of Indian economy.
  • Risk Averse banks: also depressed the lending activity in the economy.

    Gaps in fiscal stimulus:

    • Inflated Fiscal stimulus: having only a tenth of the total allocation as real demand generator.
    • Over-compensation by monetary policy: to increase the liquidity in an environment where industrial activity is depressed, and banks are themselves unwilling to lend due to risk perception.
    • it is not expected to kick-start the economy.

      Way Forward: 

        • Right fiscal-monetary Policy mix: having larger component of direct spending which can provide cash in hands of people to rejuvenate demand in the economy.
        • Transparency in number: related to economic data should be maintained which can be used by the lenders to continue less risk credit disbursal.
        • Pro-active approach: Since this crisis is like no other, the response should also be like no other. Measures taken by certain other countries, such as Canada, provide pointers.