Time to put economy back on the rails

The passing year is sure to linger on in many Indian minds as the worst that they lived through.

The lockdown the government declared on four-hour notice in March to check the spread of coronavirus was harsher than what people elsewhere experienced.

Closure of factories and businesses left millions jobless. Those who could keep their jobs suffered pay cuts. With no trains or buses to take them home, migrant workers stranded in the cities trekked to distant villages.

As the pandemic struck, the economy went for a tail spin. Data published later showed that during April-June it shrank by 24 per cent (in comparison with the figure for the corresponding quarter of the previous year).

This was the highest contraction among all the large economies. 

Thereafter the government eased the lockdown curbs to facilitate resumption of economic activity even though the pandemic was still spreading.

Official figures indicated remarkable improvement in the situation during the July-September quarter. The economy was still in a state of contraction, but the rate of contraction had come down to 7.5 per cent. It needs to be noted that few economists trust the data given out by the administration. But then that is all we have to go by.

The fact is that, when the pandemic arrived, the economy was already sliding downwards as a result of measures like devaluation of high-value currency notes and roll-out of goods and services tax. The government had taken these steps without adequate forethought.

Prime Minister Narendra Modi was able to shift the blame for the economic setback from his own actions to the pandemic. Last week the Governor of the Reserve Bank of India, Shaktikanta Das, gave the nation some good tidings. The economy is “almost at the doorstep of revival process,” he said.

He added that financial entities needed capital to support growth. Many of them had already raised capital and others were planning to do so. He gave credit to the government’s fiscal policies and the RBI’s monetary policies for the quick recovery from the impact of the pandemic. He expected the government to now draw up a fiscal roadmap for economic recovery.

Modi’s penchant for acting without giving enough thought to the consequences of contemplated action remains a source of worry in this context.

He had entered the national stage with exaggerated accounts of Gujarat state’s progress under his stewardship. He overcame the negative impact of his Bharatiya Janata Party’s communal agenda and his own image sullied by the 2002 riots in the state by projecting himself as a promoter of development.

Under his predecessor, Manmohan Singh, a highly respected economist, India had emerged as the fastest growing economy. Modi spoke disparagingly of him as “Cambridge economist.”

A reputed economist, Raghuram Rajan, who had previously served as Chief Economist and Director of Research at the International Monetary Fund, was RBI Governor when Modi took office. He earned Modi’s displeasure by cautioning him against demonetisation, and was denied an extension. There are well-known economists like Nobel laureates Amartya Sen and Abhijit Banerjee to whom Modi can turn for advice but he likes to seek advice only from those who will tell him what he likes to hear.

Former Jawaharlal Nehru University professor Prabhat Patnaik, a Marxist economist, recently pointed out that India’s record in providing distress relief in the cotext of the pandemic was the worst. The United States had come up with a relief package amounting to 10 per cent of its GDP. Japan and Germany had packages amounting to 5 per cent of GDP or more. The Indian relief package, announced in two phases, was just about 1 per cent of GDP. India, he wrote, was the only major country which failed to make cash transfers to those in distress.

As falling demand put industries in distress, the government had come up with stimulus packages for select industries like automobile and construction before the pandemic struck. They did not yield anticipated results. As most people had to dip into savings to tide over the pandemic period, the demand for goods is likely to remain low in the immediate future. The situation calls for steps to stimulate demand through massive government spending or transfer of funds.

Now is the time for the government to spell out how it plans to put the economy back on the rails.