That shrinking feeling

The government must step up spending, even if it involves overshooting the fiscal deficit target

AuthorPublished: 3rd Sep 2020  12:00 amUpdated: 2nd Sep 2020  11:38 pm

The exogenous economic shock handed out by the coronavirus-induced lockdown has been the harshest in India, making it the world’s fastest contracting major economy. The country’s economy shrunk by a fourth of its size in the April-June quarter, with no sign of revival in sight. This is the first contraction after quarterly data started getting compiled in 1996. According to the data released by the National Statistical Office, the GDP contracted by a staggering 23.9%, which is larger than the 19.2% figure projected by a Bloomberg poll of economists. This shows that the nationwide lockdown, which was in place in April and May, has taken a heavy toll on economic activity. A look at the gross value added (GVA) figures, which is GDP minus taxes, shows that the non-farm economy has suffered a severe contraction. There could be a further downward revision of the figures as informal sector numbers become available at a later stage. Agriculture is the only sector that has registered growth as farmers, braving the pandemic, have ensured that there is a bumper harvest in time. Had it not been for agriculture that saw a growth of 3.4%, the situation would have been much worse. The contraction is expected to continue for about six more quarters before revival can happen. The strict enforcement of lockdowns, which was, of course, essential to check the spread of the infection, has forced people to consume less, thereby reducing the demand and resulting in a dramatic reduction in tax revenues.

There is an urgent need to unveil another round of fiscal stimulus package, which is the only way to spur demand. The government must step up spending, even if it involves overshooting the fiscal deficit target set under the Fiscal Responsibility and Budget Management (FRBM) Act. Micro, small and medium enterprises, which are now using less than three-fourths of their production capacity, must be given the required boost. The option of direct cash transfer to the vulnerable sections of citizens must also be explored. Since the States have been in the forefront of the battle against the coronavirus, bearing the brunt of its debilitating impact, the Centre must address their concerns and resolve issues pertaining to the implementation of the Goods and Services Tax (GST). The States must be paid the compensation due to them at any cost. It would be ridiculous to seek solace in the fact that the United States and the UK economies have also shrunk by 31.7% and 20.4% respectively. This is because their recoveries would be quicker and the impact of contraction on the common public would be much lesser. It is a matter of great surprise that China, the source of the novel coronavirus, grew 3.2% during this quarter.

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