Right turn at the wrong time (The Hindu)

Mains Paper 3: Economy 
Prelims level: PM-Kisan
Mains level: Structural reforms in Indian economy 

Context:

• The Modi government’s has been clear from day one but the same cannot be said about its economic philosophy. Many have wondered if it had one in the first place. Its past actions, especially in the first term, fuelled confusion. It failed to reduce the role of the government despite campaigning for `minimum government and maximum governance’.
• The governments prefer rapid economic growth to lift people out of poverty and specifically eschew welfare programmes. The BJP government has not only chosen to support schemes of the earlier UPA government such as MGNREGA but has also launched its own direct cash transfer to the farmers (PM-Kisan).
• It chose to sacrifice fiscal prudence, a pre-requisite to keep interest rates low and create the necessary conditions for a rapid economic growth. At one point in time, Modi appeared to head a government with right-wing political ideology and a socialist economic philosophy.
• The OECD expects the world economy to shrink by as much as 7.6 per cent in 2020. India is taking a bigger hit. In the first quarter of 2020-21, its GDP shrank by 23.9 per cent and the full-year economic contraction is estimated between 9 and 12.5 per cent.

A tight-fisted approach:

• Under the circumstances, one would have expected the Modi government to follow its peers and offer large-scale stimulus to revive the economy. But it has chosen to be tight-fisted. 
• The stimulus offered so far works out to just 1.2 per cent of GDP. In comparison, Japan’s stimulus works to 21.1 per cent of GDP and US’ at 13.2 per cent. Even India’s Baa-rated peers, according to Moody’s, have offered more — on an average 2.5 per cent of GDP.
• The Finance Ministry’s assessment of the pandemic’s impact seems to be very different from that of other governments or central banks, including the RBI, which has acted decisively and announced innovative measures to revive growth. The government strongly believes that a V-shaped recovery is in progress. But what is unclear is whether this recovery will sustain. 
• Pent-up demand and building up of stocks in anticipation of festive sales (and a possible return of lockdowns if virus surges again) has seen capacity utilisation among industries rise sharply. 
• For instance, auto sector wholesale sales have risen sharply but vehicle registrations have been low indicating stocking up with dealers.
• The government is unperturbed and justifies its reticence to spend on the ground that its recklessness now will hurt in the future. It seems to be haunted by the 2008 stimulus which caused sustained inflation (touched 10 per cent) and pushed fiscal deficit to 6.5 per cent of GDP. 

Reasons behind the concern is wrong:

• The pandemic, on the other hand, has delivered a body blow to both demand and supply. It has come after two years of slowdown which has strained the balance sheet of both the government and the industry. And, the banking system is in deep distress to support growth.
• And, two, the 2008 stimulus was not bad after all. It restored 8 per cent growth. The problem was that it was allowed to play longer than what was required.

Sputtering growth engines:

• Poor domestic consumption and exports mean that private investment, which fell to 22.3 per cent of GDP (it was 35.81 per cent in 2007 when the economy was growing at over 8 per cent) in Q1, will remain low for months, if not years, to come. 
• The companies now are more keen to pay off their debt and de-leverage their balance sheets rather than expand. The fourth engine of growth, government spending, was slightly better at ?4.86 -akh crore against ?4.18-lakh crore in Q1 FY20.

Experts sceptical:

• For the economy to grow most growth engines must fire. Today, for that to happen private consumption should rise sharply. The government and the industry are hoping that festive sales will trigger that. But experts are sceptical.
• The September round of RBI’s Consumer Confidence Survey registered its third successive all-time low. Rural demand has been good but not enough to compensate for urban pessimism.

Conclusion:

• To ensure a change in sentiment, a fiscal stimulus appears necessary. Only a sustained increase in demand will push the industry to start investing again. If that happens, three of the four engines of growth will fire (public consumption, private investment and government spending) causing economic growth to return.
• By not spending now, the government runs the risk of getting disillusioned with its new found economic ideology which will work best for India under normal circumstances.
• Without a strong stimulus, the recovery will be slow and painful. All the four engines of growth are sputtering. Private consumption (spending by people) in Q1 FY21 has seen an unprecedented 26 per cent drop. Exports, which fell by 20 per cent in the first quarter, is showing signs of recovery but is still expected to decline by 10 per cent this fiscal.•    One, the present crisis is very different from the global financial crisis in 2008 whose impact was more financial. It came on the back of three years of over 8 per cent GDP growth and banks were in a much stronger financial position.

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Prelims Questions:

Q.1) With reference to the International Day for Disaster Risk Reduction, consider the following statements:
1. International Day for Disaster Risk Reduction will be observed on 13 October, 2020.
2. The International Day for Disaster Risk Reduction was started in 1989, after a call by the United Nations General Assembly.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: C