Coronavirus – Economic Issues

Recovery takes more than reforms

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Increasing the public spending for economic recovery

The article takes an overview of the impact of the second covid wave and suggests the need for more public spending.

Impact of reforms in recovery

  • Overlapping State-level lockdowns that started in April have now lasted for almost as long as the nationwide lockdown of 2020, impacting the economy.
  • Output may well have contracted in the beginning of this year.
  • So, though recovery will eventually come, it could be W-shaped rather than V-shaped.
  • It is asserted that the economy will recover due to the reforms planned or already implemented by the government.
  • Since 1991, the term ‘reforms’ has been used to mean both policy changes that remove restrictions on private sector activity in certain areas and those that increase profits in existing lines of production.
  • Recent examples of such reforms include the Atmanirbhar Bharat Abhiyaan launched in 2020 and the significant lowering of corporate tax in 2019, respectively.
  • However, more reforms may be ineffective in spurring recovery.
  • Presently for the private sector is not undertaking investment given their expectation of the state of the economy in the near future, upon which their revenue will depend.

Public expenditure

  • In February, believing that the peak of the epidemic had been crossed, the government reverted to fiscal consolidation or the paring down of the fiscal deficit.
  •  Accordingly, it raised its budgeted expenditure by less than 1% in the last Budget.
  • But now, with a possible further contraction of the economy, to continue with the frigid fiscal stance would be disastrous.
  • Data from the Centre for Monitoring Indian Economy show that unemployment has risen in May, indicating slack demand for output.
  • With this knowledge, the private sector is unlikely to respond with alacrity to liberalising reforms.

Way forward

  • The objective is to revive the economy, public spending is the instrument and the funding must be found.
  •  It need not involve money creation.
  • India’s public debt is low by comparison with the OECD countries, and debt financing remains an option. 
  • Even if money financing is adopted, it need not cause accelerating inflation.
  • How the expansion is financed is less relevant for inflation at least in the near term. 

Consider the question “Are the economic reforms enough to ensure the recovery of the economy? Also, examine the importance of public spending for economic recovery.”

Conclusion

Reforms albeit important for the economy in long run, may not be much effective in an economy battered by the pandemic. What we need is public spending and welfare measures.

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