Published: 11th May 2020
Defeating COVID: How the Indian economy can bounce back to shape after the lockdown ends
Is FDI the way to go or should we be printing money? Which are the sectors that need our attention? We spoke to economists who found solutions to some of the major dilemmas India is in right now
The Indian economy was not doing well even before the Coronavirus pandemic and an impending economic crisis was already knocking on our doors. We all agree that India needs to get back on its feet but the way forward is a debate that has been on for quite some time. While the Modi government has made a case for attracting more investment, economists like Nobel laureate Abhijit Banerjee said that the government should concentrate on providing cash transfers to the bottom 60 per cent of the population to revive the economy.
Moody's Investors Service on May 8 said it has estimated India's GDP growth will hit 'zero' in FY21, and pointed to a wide fiscal deficit, high government debt, weak social and physical infrastructure, and a fragile financial sector as the reasons. While bouncing back to normal is not possible in one shot, economists agree that the way ahead is creating demand by putting money in people’s hands and simultaneously starting the supply chain. “The pandemic has hit both the supply and the demand side. The supply side was hit when the factories stopped working and the demand because people have either lost jobs or suffered pay cuts in both the unorganised and the organised sector,” said Dr Anamitra Roy Chowdhury, Assistant Professor at the Centre for Informal Sector and Labour Studies, School of Social Sciences, JNU. "What started with the labourers losing their livelihood has not stopped there — people have lost jobs in the media, private sector employees have suffered pay cuts and the government has also said that it might not pay the dearness allowance going forward. The longer the lockdown is extended the more these problems will intensify," he added.
India had started the lockdown earlier than most countries and some studies even dubbed it the strictest lockdown. But we might not have managed it too well. "There is a narrative that is coming up quite often which is lives versus livelihood. It should rather be lives and livelihood. We have seen an example across the world that it is possible," said Dr Partha Chatterjee a Professor of Economics at the Shiv Nadar University. "There will be major structural changes. We will be rethinking the whole process. The consumer's behaviour will also change. While we might not get back to what we knew as normal a few months back we will get to a steady-state that we will call the new normal. There is no question that the government needs to be involved in a big way in this makeover — they have to think about every detail from industries to services to agriculture and within that the geographic distributions. We also have to think about the humanitarian side of it because everyone has been impacted," he added.
While the government has said, time and again, that they will provide support for the marginalised sections of the society, there has been criticism that the support is not enough. Speaking at a webinar, Former RBI Governor Duvvuri Subbarao said that the government announced the fiscal support package of 0.8 per cent of the GDP which is insufficient. “It was announced on March 26. It looks even lesser now. In fact, the government needs to spend more. The first item of expenditure is to enlarge and expand the livelihood support," he said. “The government needs to cover more households, give more per household and give for much longer per household. That is the first challenge on the government expenditure,” he added.
The consumption reshuffle
If we look at the Indian data before the COVID crisis, the consumption of transportation would have increased four times and that of food would have doubled in the next decade, said Dr PG Babu, Director of the Madras Institute of Development Studies. "It would have surpassed even China in these two factors. But now things will of course change — we are cutting down on transport and there is a general fear factor even though the official numbers are less than a lot of other countries. If that persists, it will definitely change our consumption of goods and services. Our everyday consumption has a big element of a social aspect to it. A large part of that consumption can be given up. This might lead to huge economic losses," he said. "If people are scared to come back to work that too will have detrimental effects. The migrant labourers had not received proper help from the government and this might lead to a lack of trust among them. This, in turn, can affect their decision to come back to work. If they do not come back, that will drive the wage rates up and the consequently increase the cost of production," he added.
Economists have time and again suggested a 'stimulus package' that the government should come up with to help the people and the economy to get back on their feet. But how should it be delivered is the big question. One prescription for all won't work, said Dr Chatterjee. "Even something like a universal income or a direct transfer won't help if it is the only approach. Look at the migrants — we do not even know where they are or if they have access to bank accounts even if they have them? In the very little financial package announced the government had allocated a sun for the workers but who has got it? How was it disbursed? The details are not there," he said. "Immediately, the government needs to figure out how to strengthen the already resistant Public Distribution System (PDS). The network is strong and is spread all over the country. We can make it universal. There is not to lot to worry about people taking advantage of this to misuse the system. The next are the small and medium businesses. While it is not easy to reach them because a lot of them are not registered, the government can offer loans without interest or with a low rate of interest for them to start their businesses again. It would be probably easier to reach them through the banks and give them access to funds," Dr Chatterjee added.
Providing aid at this point not only has economic repercussions but should be done on humanitarian grounds, said Dr Roy Chowdhury. "We need to provide people with financial aid immediately. How to finance this can be varied. The government can come up with a surcharge on certain items — which they already have — print money or even come up with government bonds that can finance this aid," he said.
But can we trust that the government will be able to provide for the poor of this country? Economist Dr Amit Bhaduri not only believes that the government cannot, at this point, arrange for monetary aid for the workers, he believes that cash transfers might not be the way to go. "I also do not believe in cash transfers. If the government cannot arrange for the workers to go back home how are they going to guarantee a minimum wage for them?" he asked and suggested, "As far as urban unemployment is concerned, one important thing that has not been talked about is to at least to go from one shift to double shifts. This will immediately double the number of jobs. Without purchasing power, the economy cannot pick up neither will it prosper just by giving money to the Adanis and Ambanis," said Dr Bhaduri.
While the rural areas have lot more employment generation schemes, it is time the urban areas might need that too. Will an unemployment guarantee scheme work in the urban areas as well? "Something like this might work. Except there is a big difference — the urban governance in India is not as streamlined as the rural governance or the Panchayat system. It's a lot more complicated and thus managing this will be more difficult. We do probably need an MGNREGA kind of a scheme but the government needs to sit down and figure out how to implement that," said Dr Chatterjee.
Get to the mint
Another aspect that comes up is funding these many schemes might not be possible for the government right now. Dr Bhaduri suggested that the government should print notes to fill in the gap and since we have enough stock of food grains for at least three to four months and this will not lead to a situation where we have more money but fewer goods — there is no fear of huge inflation soon. "The first thing they can do is monetise their deficits. Rather than borrowing from the market they can do deficit financing and take to printing notes provided they spend it on employment guarantee and decentralising rural areas and so on," he added.
While there might not be inflation looming over us but there are other challenges to printing money, pointed out Dr Chatterjee. "The trick is to ensure that the government financers will be back in the market within a reasonable amount of time. Otherwise, there can be a run in the country in terms of the money going up, exchange rates falling to abysmal levels etc. Right now no one would mind the government spending more if they have a reasonable plan to get back on track soon. But where is that plan?" asked the professor.
Now might also be the best time to provide financial aid or the 'stimulus package', feels Dr Babu. "Now that the government has allowed shops to open up we would see more demand if they have money in their hands. When everything was closed, giving money to people might not have helped as they would not have anything to buy. But this is certainly the time to start putting some many in people's hands," he said. "The government should also spend money in sectors which were predicted to grow. For example, infrastructure like roads and highways. If the government invested there, it would have a huge backward linkage. Maybe this is the time to invest more in health as well. Education too is a sector that would benefit from increased government spending. These are all public goods that the government can spend on and they have proven to have growth effects as well. If we are setting priorities, it is in these sectors," Dr Babu added.
To attract or not to attract FDI
The Indian government has recently harped on the benefits of attracting foreign investment more than anything. But is FDI our way out of the economic rut that we are in right now? "FDI will not make any difference to the country. It’s only lobbies which talk about FDI going up or down," said Dr Bhaduri. Economists have criticised the government's affinity towards FDI and said that this cannot be the way out of the crisis. "FDI will not help us. Even before the crisis, we were in a downslope for quite some time. I don't see any signs of an overnight change. Slogans like Make In India have remained slogans. We never put much content into that. If that plan did not work there is no reason why it will work now," added Dr Babu.
There are risks of investment as well and at a time like this, the risks have aggravated. "Why will an investor put money where there is not a market? There is no guarantee of a free flow of labour or input. Who would want to invest in a new place? Moreover, this will take a long time and we also need a market for the products that the FDI will generate. Do we have a market for that?" asked Dr Roy Chowdhury.
The government needs to analyse things like a business here, said Dr Chatterjee. "They need to think like a business. Figure out who the competitors are, their strengths versus our strengths. Why would some investor choose us? A good country to compare us with is Vietnam. The population is not negligible and the development stage there are in is in some ways similar to India's. The big difference is their school education is free and compulsory. They have also managed the crisis nicely. It is not because it is a non-democratic country but the same has happened in Taiwan and South Korea. It is more about the planning which we lack. I would like to see the plans the government has for us to use FDI to come out of this. But where is it?" asked Dr Chatterjee.
What then is the way forward?
India will have to come up with a phased plan to revive the economy that is now being predicted to contract in the recent future. While the first step can be providing a stimulus package and driving the supply side simultaneously, it cannot stop at that. India needs to revisit its priorities and invest more in sectors that can drive its growth in the times to come. While FDI is good for the long run, it cannot be the only weapon in the one pronged attack to this economic crisis, agree the experts. Printing money to finance the deficit is the way to go now and that will not cause any immediate inflation as we have stocks. We won't fall short on supply soon. The government is set to announce its second economic stimulus package this week and is predicted to offer support to MSMEs and workers along with some reforms.
Therein lies the answer to a complex question. Until then, there's going to be very little paisa vasool.