Issues related to Economic growth

How policy can bridge the gap


From UPSC perspective, the following things are important :

Mains level : Paper 3- Economic policy changes to mitigate the impact of slowdown on the vulnerable.


India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.

Estimates of impact

  • Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
  • Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
  • Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.

Prospects of recovery

  • Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
  • There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
  • Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
  • Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.

India needs to brace itself

  • Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
  • The lockdown could be for an extended period given the already stretched public health system.
  • Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
  • Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.

Role of economic policy

  • What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
  • While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
  • This requires policy support to be operated on various fronts.
  • Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
  • Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
  • Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
  • Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
  • Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
  • The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
  • According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
  • For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
  • With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.

Issue of fiscal space and solution

  • Some will argue that India doesn’t have the fiscal space. But it does.
  • Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
  • If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
  • If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
  • And this without even having to increase this year’s budgeted deficit.


The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Notify of
Inline Feedbacks
View all comments


Join us across Social Media platforms.

💥💥[Course]Smash Ethics by AIR 48, Ethics Topper 133 marks.
This is default text for notification bar