What are the consequences of the Covida 19 pandemic for India? The Reserve Bank of India expects the Indian economy to contract in the current financial year. However, in view of the recent publication of the GDP data for the quarter ending March 2020, it may be necessary to carry out a full analysis. In a series of three articles on data journalism, HT tries to do just that. The first part, which was published in the 6. The report, issued in June, deals with the economic situation before the pandemic. The second part, published yesterday, dealt with the immediate effects of the crisis and its macroeconomic consequences. The third part states that the existing policy response may not be sufficient.
On the 12th. In May, in his speech to the nation, Prime Minister Narendra Maudie announced an economic package of 10% of India’s GDP. Finance Minister Nirmala Sitaraman announced the details of the package at press conferences in the next five days. The package is actually on ₹20 lakh crore. But actual budgetary expenditure is much lower. In fact, two thirds of the package is focused on credit injection programs. These include government guarantees and the provision of additional liquidity by the Reserve Bank of India. The package also announced the main steps for the deregulation of agricultural markets.
The lack of tax incentives has surprised not only commentators, but also the markets. In an analytical note from Prandjul Bhandari, chief economist for India at HSBC Securities and Capital Markets, it is said that while markets expect greater demand, the… emphasis has been placed on medium-term supply-side measures.
What should the purpose of the economic package be during this pandemic? This depends on the economic situation before the pandemic. If the economy is healthy, it should focus on restoring the status quo. But that’s not the case in India. As mentioned in the first part of the series, the Indian economy was in one of the worst recessions before the pandemic. It will therefore not be enough to bring the economy back to the level it was just before the pandemic, however difficult that may be.
The first part of the series argues that India experienced a slowdown in demand growth before the start of the pandemic. In the second part it was argued that income losses due to return migration could reduce income and demand in rural areas. It is therefore unlikely that supply-side measures, such as restricting credit supply, will help stimulate the economy, although some companies may benefit from them.
As regards the focus on reforms, the most important element of the announced package, not all reforms will lead to an increase in demand. Reforms facilitate business activity and thus make the economy more attractive for investment.
A classic example of how something aimed at improving the business environment cannot lead to sustained demand is the failure of the corporate tax reforms announced last year to increase investment activity.
Where did the request come from? In today’s economy, it comes from three sources: domestic consumption, exports and investment. Imports represent a negative demand because the purchasing power of the national population is diverted to foreign goods. Before the 2008 financial crisis, India was in a good phase of export growth. The results since 2008 have been disappointing. Given the multilateral trade regime, increasing protectionism and trade wars and the shock of the pandemic, exports are unlikely to recover in the foreseeable future. Another factor that would prevent an export boom is India’s inability to join a major mega-regional trade agreement. The fact that exports do not stimulate growth, as was the case before 2008, is a structural shock to the Indian economy.
Remaining use in captivity. In the recent period, private consumption expenditure accounted for almost 60% of India’s GDP. The private spending of the Indians is very unequal. Analysis of the NSI data for 2011-12 (the most recent data available) shows that almost half of them were among the richest 20% of the population.
NSO figures are likely to underestimate income inequality in India. Analysis of income tax data shows that 90% of income taxes in India account for 5% of the 50 million people who file a tax return. India’s labour force consists of more than 400 million people.
What can be done to increase consumer demand? The consumption of the rich could even decrease instead of increase. Niranjan Rajadyakshi explained in his column why this could happen because of the economic pain of the pandemic. Preventive saving increases as a result of income insecurity. People who survived the storm understand how important it is to save money for a rainy day, the column said. It is therefore very likely that the income insecurity people are currently facing will encourage Indian households to increase their precautionary measures, at least in the coming years. And this psychological transition can continue, even if the Indian economy gets back on track, he adds. As private consumption in India has shifted to the wealthy, a drop in consumer demand will make economic recovery even more difficult. As the column explains, a simpler loan may not be useful in this case.
It leaves the investment behind as the engine of growth. The demand for capital goods is a derivative demand. If the economy does not see future growth in domestic demand or exports, it will not invest. That’s exactly what’s happening in India.
What does this mean for the prospects of the Indian economy? The concept of the economic paradox, developed by John Maynard Keynes, is important here. She says total demand would fall if everyone in the economy started saving more. This will lead to lower revenues. As the savings are part of the income, the savings of the group will also decrease.
So, what do we do? A democratically elected government cannot force people to make consumption or saving decisions. However, it makes sense to focus attention on the poorest 80% of the population. Usually it is difficult to make ends meet. She can barely save, even if she wants to. NSSF data show that at least half of India’s population spends half of its budget on food. This represents 40% of the weight of food in the Indian retail inflation basket. The priority given to food in the family budget is also the largest political-economic gap in India. Rising food prices hurt the poor. Bruises hurt the peasants. Governments juggle this balance.
But it doesn’t have to be a zero-sum game. The extension of the current food security programme could benefit both farmers and consumers. One such means would be to use MGNREGS workers for private agricultural activities. You can reverse this trend almost immediately. The rice growing season starts in a few weeks.
Health and education services are another area where changes may occur in the medium and long term. In India, even the poor spend more than they can afford on private education and health care. The improvement and expansion of public services could change this trend.
Investment in food security, health, education, etc. is generally seen as a diversion of resources from the physical infrastructure, which contributes directly to growth. In India, this argument may have had some advantage as long as the consuming classes consume. Without incentive – the package announced by the government gives the people little – is a twisted argument. Public spending in the food and social sector, even if wages stagnate or fall slightly, could release a lot of money for the poor in the non-agricultural sector. It could just be an extra pair of flip-flops or a bike.
The series is based on the author’s work as a visiting scientist at the Centre for Advanced Studies of India, University of Pennsylvania. It is currently being prepared as a working document.