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How Will the Indian Economy Recover from the Distress Caused by Covid-19?

India went into lockdown on 25th March 2020 and currently it is going through its unlock phases to reignite economic activities and protect its various sectors and industries. The government and the central bank have together imposed certain fiscal, monetary, and social policies.

Recent data suggests that the Indian economy has faced a pronounced slowdown. Its GDP shrank 23.9 percent in the second quarter of 2020. In aggregate terms, households saw reduced income and wealth, therefore consumer spending saw a sharp downfall.

In Economic theory, this slowdown seems to represent the phase of a recession caused due to the falling aggregate demand, which has led to a supply shock that in turn reduced production activities as we also saw a huge fall in investment spending.

This article discusses the short-term policy measures and planning that would help for a sustainable recovery of the Indian Economy.

 

Expansionary Fiscal and Monetary Policy

Increase fiscal deficit by increasing government expenditure and/or reducing taxes. The purpose of this policy is to inject money into the economy and alter people’s behaviour in such a way that they save less and spend more.

To correctly balance this policy an expansionary monetary policy would also be needed. A stronger and dominating monetary policy is recommended that would lower the net interest rate as it would discourage saving and promote consumer spending.

 

Reduce Interest Rates across both savings and borrowings

During times of uncertainty, households save in the present to protect themselves in case of unforeseen circumstances in the future, this is called precautionary savings. Reducing interest rates on savings would make it less lucrative and households would rather be willing to spend. On the other hand, firms and businesses would take benefit of the lower interest rates to borrow funds in order to support their activity and expand their production capacity.

 

Disinvestment

Disinvestment programme should be accelerated as an alternative source of revenue. This can be done by stake sale in PSUs, by selling unproductive and non-lucrative assets, etc.

 

Temporary Raise in fuel prices to earn quick revenue for the government

 Considering the need for quick revenue for the government, this could be done by a temporary small rise in fuel prices, but also making sure that this step does not have a multiplied effect on the increase in transportation costs. This can be maintained by strict vigilance, otherwise this would raise inflation.

  

Easy Availability of credit and direct cash transfers to the poor

Such a pandemic was not anticipated, and businesses of all sizes; including small and medium enterprises, start-ups, etc, were not ready to withstand such a sudden shock. Cheap and easy availability of credit would help them sustain in the current period and at least keep their businesses alive. The central bank (RBI) will have to allow for an increase in liquidity, i.e. increasing money supply in the economy.

Such can be done by:

  • Purchasing of securities by the RBI (Open Market Operations)
  • Reducing the reserve requirements
  • Reducing the repo rate

Direct cash transfers to the accounts of the poor would help them to support their daily needs and basic requirements; especially families in rural regions who primarily depend on a single source of income. The people in rural India need to be involved continuously through planned policies and programmes, so that we see development across all strata of the society, and not just the privileged ones.

 

Lucrative VDIS (Voluntary Disclosure of Income Scheme)

The is a one-time, short term scheme that would give taxpayers and past tax-defaulters the chance and immunity to come clean and convert their undisclosed income to disclosed income at a certain lucrative reduced tax rate. This scheme would bring out a lot of money into the system immediately, which the government can then reallocate for development purposes and boosting economic activities.

 

Amnesty Scheme for Loan defaulters

A one-time amnesty scheme would give loan defaulters the one-time opportunity to pay a certain percentage of the loan amount and clear off the liability. This would help at least some money come back to the banks, even though the promised amount is not recovered. The NPAs would remain, but slightly less negative. This would not only reduce the NPA but also develop a sense of social responsibility in the borrowers to repay the maximum amount at their current capacity, instead of being a defaulter. This scheme should be judiciously structured with combination of some upfront payment, moratorium and restructuring of loans.

 

Insulate the Economy (Deglobalize and barriers to international imports for a fixed duration)

India’s imports significantly fell on average compared to the previous years. It would be economically right to circulate money within the economy and meet short term demands by self-producing certain goods that were previously imported. Such a policy should be implemented for a fixed period in order to not destroy the trade relationships in the long-term prospects.

 

 

Reduction of Income Tax and Corporate Tax

The reduction in taxes will produce more money in the hands of people and business houses which will spar the growth of spending. Households will spend to create more demand and business will invest to create more jobs.

 

I am confident that the present devastating pandemic situation will be over in the very near future, but it will leave the toughest ever challenges to the civilizations in the economic front. India, as a very resilient country, will definitely be able to fix this in the shortest possible time by implementing effective economic policies and planning with the support and cooperation of people of the country.

 

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