There have been big shocks to the economy over the last four years: demonetisation, transition to GST, pandemic induced lockdowns. A fallout has been arrested economic momentum since the beginning of 2018-19. The lockdowns have led to a dramatic 23.9% plunge in GDP in the April-June quarter. The uneven lifting of restrictions across India has improved things. However, it is unlikely we will see a quick recovery. Not only did the restrictions strike an already stressed economy, the pandemic’s cross-country impact has removed a potential source of early recovery.
This leaves the government as the only player in the game with the potential to catalyse a reversal. Its first reaction was to blunt the impact of Covid-19 and the lockdown through food relief and cash transfers, among other measures. On its part, RBI unveiled a package of liquidity measures meant to lower interest rates and ensure availability of credit. This will have only a limited impact in the current context. Who wants to borrow with uncertainty clouding the future? Also, won’t banks that haven’t yet fully recovered from the last round of bad loans remain risk averse?
There are three separate but mutually reinforcing measures which the government can take to remedy the situation. All things considered, there’s a strong case for another round of cash transfers. A headline fall of 23.9% in GDP signals that the hit has been worse for the informal sector. Farm households too depend significantly on non-farm income. Separately, the government needs to follow through on the reforms it announced earlier, particularly those which deal with factors of production such as labour and land. However, by themselves these measures will not be adequate to change things enough.
The most powerful tool which the government can use in the current context is to step up public investment. Research shows that public investment plays a role in drawing private investment. Handing out of contracts activates the job market and puts income in the hands of people. It will also eventually sync with RBI’s liquidity measures and crowd in private investment. Unlike private firms and households, the government doesn’t face the same degree of constraints when it comes to borrowing. This is not the time to quibble over debt. Economic growth is indispensable. India has to literally grow its way out of its problems. For that, the government has to step up now.
This piece appeared as an editorial opinion in the print edition of The Times of India.