Coronavirus – Economic Issues

Economy and the challenges ahead

Note4Students

From UPSC perspective, the following things are important :

Prelims level : GVA, Fiscal deficit

Mains level : Paper 3- Extent of damage to various sectors of the economy and challenges ahead for the government.

Various projections of growth paint a grim picture of the Indian economy as well as the global economy. This article analyses the sector-wise impact and comes with the GVA projections for 2020-21. The government has to deal with serious challenges like financing huge fiscal deficits. So, what will be the growth rate for 2020-21 and what will be the size of GVA? Read to know!

Projections of growth and uncertainty

  • Various institutions have assessed India’s growth prospects for 2020-21 ranging from 0.8% (Fitch)to 4.0% (Asian Development Bank).
  • This wide range indicates the extent of uncertainty and tentative nature of these forecasts.
  • The International Monetary Fund (IMF) has projected India’s growth at 1.9%, China’s at 1.2%, and the global growth at (-) 3.0%.
  • The actual growth outcome for India would depend on: 1) the speed at which the economy is opened up 2) the time it takes to contain the spread of virus, and, 3) the government’s policy support.

Health of India economy before the crisis

  • India slid into the novel coronavirus crisis on the back of a persistent economic downslide.
  • There was a sustained fall in the saving and investment rates with unutilised capacity in the industrial sector.
  • In 2019-20, there was a contraction in the Centre’s gross tax revenues in the first 11 months during April 2019 to February 2020, at (-) 0.8%.
  • These trends continue to beset the Indian economy in this crisis.

Growth prospects for 20-21 from the output side

  • In 2019-20, which would serve as the base year, India may show GVA growth of about 4.4%,
  • This is well below the Central Statistics Office’s second advance estimate of 9%.
  • The IMF’s GDP growth estimate for 2019-20 is at 2%.
  • GVA is divided into eight broad sectors. Although all sectors have been disrupted, some may be affected less than the others. We divide the output sectors in four groups.
  • Group A- This group is likely to suffer minimum disruption.
  • Agriculture and allied sectors, and public administration, defence.
  • Despite some labour shortage issues, agriculture sector may show near-normal performance.
  • The public and defence services have been nearly fully active, with the health services at the forefront of the the COVID-19 fight.
  • For the group A sectors, it may be possible to achieve 90% of the 2019-20 growth performance.
  • Group D- This group is likely to suffer maximum disruption.
  • This includes, trade, hotels, restaurants, travel and tourism under the broad group of “Trade, Hotels, Transport, Storage and Communications”.
  • This sector may be able to show 30% of 2019-20 growth performance.
  • Group B
  • This comprises sectors which may suffer average disruption showing 50% of 2019-20 growth performance.
  • These sectors are mining and quarrying, electricity, gas, water supply and other utility services, construction, and financial, real estate and professional services.
  • Group C
  • In this group come manufacturing which has suffered significant growth erosion in 2019-20.
  • It is feasible to stimulate this sector by supporting demand.
  • In this case a 40% performance factor on the average growth of the preceding three years is applied.

So, what are the estimates for 2020-21 GVA?

  • Considering these four groups together, a GVA growth of 2.9% is estimated for 2020-21.
  • Realising this requires strong policy support, particularly for the manufacturing sector which has a weight of 17.4%.
  • It is also based on the assumption that the Indian economy may move on to positive growth after the first quarter.
  • In the first quarter, GVA growth will be negative.

Policy support for the growth

  • Monetary policy initiatives undertaken so far include a reduction in the repo rate to 4.4%, the reverse repo rate to 3.75%, and cash reserve ratio to 3%.
  • The Reserve Bank of India has also opened several special financing facilities.
  • These measures need to be supplemented by an appropriate fiscal stimulus.
  • Cash-constrained central and State governments have taken expenditure reducing measures by announcing freezing of enhancements of dearness allowance and dearness relief.
  • This may result in savings of ₹37,000 crore for the Centre and about ₹82,000 crore for the States, together amounting to 6% of GDP.
  • There is also talk of substantially reducing non-salary defence expenditure.
  • With lower petroleum prices, fertilizer and petroleum subsidies may be reduced.
  • These expenditure cuts are contemplated to keep the fiscal deficit under some control.

Fiscal stimulus and fiscal deficit

  • Fiscal stimulus can be of three types:
  • 1) Relief expenditure for protecting the poor and the marginalised.
  • 2) Demand-supporting expenditure for increasing personal disposable incomes or government’s purchases of goods and services, including expanded health-care expenditure imposed by the novel coronavirus, and,
  • 3) Bailouts for industry and financial institutions.
  • The Centre had earlier announced a relief package of ₹1.7-lakh crore.
  • The Centre’s budgeted fiscal deficit of 3.5% of GDP may have to be enhanced substantially to 1) make up for the shortfall in budgeted revenues; 2) account for a lower than projected nominal GDP for 2020-21, 3) provide for a stimulus.
  • Thus, the Centre’s fiscal deficit may increase to 6.0% of GDP.
  • Expenditure on the construction of hospitals, roads and other infrastructure and purchase of health-related equipment and medicines require prioritisation.
  • These expenditures will have high multiplier effects.
  • Similar initiatives may be undertaken by the State governments which may also enhance their combined fiscal deficit to about 0% of GDP to account for 3.0% of GDP under their respective Fiscal Responsibility Legislation/Law and to provide for the shortfall in their revenues and some stimulus.

Challenges

  • Financing of the fiscal deficit poses a major challenge this year.
  • On the demand side, the Central (6.0%) and State governments (4.0%) and Central and State public sector undertakings (3.5%).
  • These together present a total public sector borrowing requirement (PSBR) of 13.5% of GDP.
  • Against this, the total available resources may at best be 9.5% of GDP.
  • The gap of 4.0% points of GDP may result in increased cost of borrowing for the Central and State governments.

Consider the question, “Examine the sector-wise damage caused to the economy due to Covid-19 pandemic. What were the fiscal and monetary measures taken to mitigate the damage and challenges faced by the government in meeting the required revenue demands.”

Conclusion

The gap in requirement of resources and availability may be bridged by enhancing net capital inflows including borrowing from abroad and by monetising some part of the Centre’s deficit. The monetisation of debt can at best be a one-time effort. This cannot become a general practice. 


Back2Basics: What is GVA?

  • GVA it is a measure of total output and income in the economy.
  • It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
  • It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
  • While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
  • Both measures need not match because of the difference in treatment of net taxes.
  • GDP = GVA + taxes on products – subsidies on products
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