The green shoots of an economic turnaround that the Centre had so fondly talked about are not in sight. The Covid-19 pandemic has hit the Indian economy so hard that it will take much longer time and a series of well-structured policy interventions to get back on track. The Reserve Bank of India’s annual report for 2019-20 bears out this fact. The report has rightly focused on how consumption has taken a severe beating. The re-imposition of the lockdown by several States in July-August could be one of the major reasons for the contraction in economic activity. The prevailing uncertainty has forced people to play it safe and cut down on expenditure, wherever possible. The fact that nearly 40% of the cash transferred by the government in recent months has not been spent by the beneficiaries reflects the sorry state of affairs. Demand, not necessarily liquidity, is the main challenge facing the economy today. At a time when consumer and business sentiment is down, the only way to boost demand is another round of fiscal stimulus. There is an urgent need to draw up a road map for wide-ranging structural reforms to put the economy on a revival path. Several experts have also been rooting for a credible fiscal consolidation plan and specific action points to reduce debt and deficit levels in the aftermath of the pandemic. The pandemic and the subsequent lockdowns brought all economic activity to a halt, adversely impacting tax revenues of both the Centre and the States while expenditures have risen sharply as the governments look to combat the virus.
The government’s policy response post-Covid has been underwhelming at best, with most measures aimed at defining a broader reforms framework rather than offering immediate stimulus to sectors most impacted by the pandemic. As former RBI Governor D Subbarao has warned, the green shoots of economic revival must be seen as a mechanical rebound because India’s short and medium term growth prospects continue to remain grim and the government should not read too much into the economic activity coming back from the depressed base of lockdown. There is a need for the Centre to borrow and spend more to boost the demand. Before the Covid crisis hit India, the real GDP growth had declined from 7% in 2017-18 to 6.1% in 2018-19 and to 4.2% in 2019-20. The World Bank recently projected India’s fiscal deficit to rise to 6.6% of GDP in 2020-21 and remain high at 5.5% in the following year as against the 3.5% target set by the government. However, one positive trend, amidst the gloomy scenario, is the sign of recovery of the rural economy faster than the urban.
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