A relief and recovery blueprint for India’s economy

Economy activity has slowly but progressively recovered in stages since the lockdown began on March 25. However, the Observatory Group estimates that even if pre-COVID-19 levels of activity were to be achieved from August onwards, we would still see a double-digit contraction of GDP in FY21.

This, households and businesses require substantial economic relief and support.

Relief Through Rural Economy

With much of urban India grappling with the outbreak, rural India — accounting for 65 percent of India’s population and 45 percent of GDP — offers the best bet to support economic activity.

In this regard, much has been done. Activity under the MGNREGA has stepped up, with 37 percent of the increased full year budget of Rs 1 lakh-crore disbursed in the June quarter. Other relief measures under the PMGKY programme are ongoing.

Despite COVID-19, the Food Corporation of India (FCI) enhanced its procurement of food grains and held a record 97 million tons of stock as of end May. Besides putting money in the hands of farmers, this has allowed the government to extend universal food security till November. Additionally, favourable monsoons so far augur well for agricultural growth. Put together, this is equivalent to an additional 1.75 percent of GDP of stimulus in the hands of rural folk.

On the back of all this, the CMIE reports that India’s unemployment fell to 8.6 percent by end June, down from a peak of 28 percent in early May, and nearly back to pre-COVID-19 levels. Anecdotal evidence also points to some return of rural consumption in recent weeks.

MSME Relief

While support to the rural economy is well-directed and welcome, more steps are required by way of relief to businesses.

A double-digit contraction in FY21 GDP will deliver a body blow to many of India’s 63 million Micro, Small and Medium Enterprise (MSME) units operating across industry and services.

While Rs 3 lakh-crore of government-guaranteed credit will provide additional funding to the MSMEs, there is also a need to provide more direct relief to their bottom lines.

The MSMEs have an estimated Rs 20 lakh-crore of loans from banks and NBFCs. One way to provide direct relief to them and to the financial services ecosystem would be to offer complete interest subvention on all the MSME loans for six months. This would cost the government around Rs 1.2 lakh-crore (0.6 percent of GDP). Even if this ends up benefiting some that do not need the relief (from whom a part amount would be recovered via taxes), timely relief to the ecosystem could pre-empt the need for much larger intervention later.

Medium Term – Atmanirbhar Bharat

Alongside relief measures, a clear plan for economic revival beyond COVID-19 is also needed. This would help pay for the current relief packages with minimal disruption, in addition to helping India eventually achieve her immense economic potential.

Even before COVID-19 hit us, there was an ongoing debate around whether India’s weak economy required a demand-side or supply-side policy pivot. The essence of Atmanirbhar Bharat is that we need both.

For over a decade now, a good part of our consumption — across energy, gold, electronics, plastics, chemicals and all manner of industry intermediates — has been met by imports. Alongside, our exports growth has been tepid. In other words, we have struggled to both make for India, and to make in India.

In this context, merely putting money in the hands of people will not be enough.

When COVID-19 is behind us, we will need widespread jobs to create sustained demand growth. At the same time, our domestic output will have to at least match our increased demand. The success of Atmanirbhar Bharat centres on crafting a climate conducive for creation of sustained jobs and output growth.

Prerequisites For Jobs And Output

Transformational changes are needed to create such a climate.

First, even before COVID-19, our stressed financial services ecosystem was in no position to fund our growth aspirations. It needs an overhaul with a quarantining of a chunk of non-performing assets, alongside significant banking, governance and market reforms.

Second, many other sectors of the economy — across real estate, power, telecom, airlines and MSME — suffer from chronic stresses, and require resolution.

Third, creation of jobs and output require reforms across areas such as land, labour, law, and more.

Every area listed above has solutions, endorsed by multiple experts. However, the implementation will be anything but easy. It will call for making tough choices, embracing radical changes, and ensuring co-ordination and buy-in across multiple stakeholders.

The Triumvirate

Radical transformation of this kind requires three elements — political leadership and vision, empowered specialists and experts, and capable bureaucrats.

The presence of such a triumvirate allowed the administration to deliver on tough socio-political promises, such as getting around Article 370 of the Constitution. In a very different context, such a triumvirate allowed for the significant economic reforms of 1991.

In the last few years, economic reforms have been undertaken — the IBC, RERA, steps towards financial inclusion, and bank consolidation are examples. However, the pace, nature and extent of economic transformation has to now step up many notches, and this requires an execution team well beyond a well-functioning bureaucracy.

Our current economic policy-making seems to be dominated by the bureaucracy. The marathon February 1 budget speech, the five-part announcements that made up the Atmanirbhar Bharat package, and the subsequent progress on individual schemes all bear the stamp of the bureaucracy.

Individually, the steps are good, and incorporate many suggestions from multiple external stakeholders. However, collectively, the steps do not present a clear vision towards addressing the key issues listed earlier that come in the way of creating sustainable jobs and output in India. The steps are incremental rather than transformational, and many cans continue to be kicked down the road.

With ample political capital at its disposal, the political leadership needs to enlist and empower external financial experts more and restore the triumvirate. These experts should have much more to do than just represent that all is well. Alongside the bureaucracy and political leadership, they should be in the forefront of executing India’s arduous reform journey towards an eventual revival of sustainable jobs and output.

Conclusion

While there are silver linings, the course of the COVID-19 pandemic still remains very uncertain. The government’s steps to support the rural economy are welcome and well-directed. In addition, more steps should be taken to support the MSMEs directly, and a complete a six-month interest subvention for the MSMEs could be considered.

Our eventual revival beyond COVID-19 has to be about creating sustainable jobs and output. These in turn require transformational changes under the triumvirate of political leadership and vision, empowered experts, and capable bureaucrats. As things stand, the political leadership would do well to enlist and empower specialists and experts more in this arduous medium-term execution journey.

Ananth Narayan is Associate Professor-Finance, SPJIMR. Views are personal.