From UPSC perspective, the following things are important :
Prelims level : Investment rate
Mains level : Paper 3- Steps India needs to take to compensate for the economic loss due to pandemic.
To ease the damage inflicted by the pandemic on the economy, India needs to act on multiple fronts. The article suggests the trajectory India should follow to compensate for the economic loss due to pandemic.
Economy picking up
- As the restrictions were slowly withdrawn, the economy has also started picking up.
- There are many indicators such as collection of Goods and Services Tax (GST), the improved output of coal, steel, and cement, and positive growth in manufacturing in October 2020 which point to better performance of the private sector.
- In Q1, the economy declined by 23.9%; it declined by 7.5% in Q2, when the relaxations were eased.
- Reductions in the first half of GDP in 2020-21 as compared to the first half of 2019-20 is 7.66% of the 2019-20 GDP.
- If the Indian economy at least maintains the second half GDP in 2020-21 at the level of the previous year, the full-year contraction can be limited to about 7.7%.
Steps need to be taken
- If the Indian economy grows at 8% in 2021-22 will we be compensating for the decline in 2020-21.
- Thus, it is imperative that the Indian economy grows at a minimum of 8% in 2021-22.
- This should be possible if by that time restrictions imposed because of COVID-19 are withdrawn and the nation goes back to a normal state.
- Some sectors can act as lead sectors or engines of growth with increased government capital expenditures in them.
- The private sector seems to be revising its future prospects.
- Many new issues in the capital market have met with good response.
- The attitude to trade must also change.
- Closing borders may appear to be a good short-term policy to promote growth.
- A strong surge in our exports will greatly facilitate growth, i.e. 2021-22.
- However, much of Indian’s growth must rest on domestic factors.
- Growth must not only be consumption-driven but also investment-driven.
- It is the investment-driven growth in a developing economy that can sustain growth over a long period.
The important role of monetary policy
- The stance of monetary policy in 2020-21 has been extremely accommodating.
- Three major elements in the policy are:
- 1) A reduction in interest rate.
- 2) Providing liquidity through various measures.
- 3) Regulatory changes such as moratorium.
- There has been a substantial injection of liquidity into the system.
- With a large injection of liquidity, one should expect inflation to remain high.
- In the final analysis, inflation is determined by the overall liquidity or money supply in the system in conjunction with the availability of goods and services.
- While there may be sufficient justification for an accommodative monetary policy in a difficult year such as 2020, there will be a need to exercise more caution as we move into the next year.
Role of government expenditure
- Government expenditures play a key role in a situation such as the one we are facing.
- The stimulus policies involving higher government expenditures were expected to arrest the contractionary momentum.
- The government expenditures should be speeded up from now on so that the contraction in the current fiscal year as a whole can be reduced.
- In 2021-22, government revenues should pick up with the rise in GDP.
- The process of bringing down the fiscal deficit must also start.
- What is required is a sharp increase in government capital expenditures which can act as a stimulus for growth.
- A detailed investment plan of the government and public sector enterprises must be drawn up and presented as part of the coming Budget.
- Over the past decade, the investment rate has been falling.
- In 2018-19, the rate fell to 32.2% of GDP from 38.9% in 2011-12.
- Some of the recent measures including corporate tax rate changes may help in augmenting investment.
- A strong effort must be made to improve the investment climate. The National Infrastructure Pipeline is a good initiative.
- But the government must come forward to invest more on its own.
Reforms with consensus
- Reforms are important in the context of rapid development.
- However, timing, sequencing, and consensus-building are equally important while introducing them.
- Labor reforms, for example, are best introduced when the economy is on the upswing.
Consider the question ” Growth must not only be consumption-driven but also investment-driven. It is the latter which in a developing economy can sustain growth over a long period. In light of this, suggest the policy imperatives that India should follow to make good of the decline in 2020-202.”
To achieve the level of $5 trillion, we need to grow continuously at 9% for six years from now. That is the challenge before the economy. Jobs and employment will come from growth. They are not independent of growth. For that policymakers should eschew other considerations and focus only on growth.