Topic: General Studies 3
- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Three Steps to Economic Recovery by former PM Manmohan Singh
Context: The slowing Indian economy (GDP grew at 4.2% in the 2019-20) was further devastated by the Pandemic.
Present Economic Scenario in India
- The lockdowns and rising public anxiety about the virus led to a sharp deterioration in economic activity in India.
- Post lifting the lockdown, different parts of the economy are likely to recover from the hit at different speeds.
- Industrial activity could possibly normalise, especially in manufacturing where controlling the virus might be easier.
- However, industries in which it is harder — travel or entertainment for example — will still be in a gradual normalisation process, and probably won’t rebound completely until a vaccine is available
Do You Know?
- Some economists project India’s real GDP to contract by 4.4% in FY21; this would be the deepest recession India has witnessed since 1980.
- The global GDP to projected to contract by 3.5% in 2020, which can be considered as deepest recession since at least the Second World War
How is the present economic shock different from previous crisis (like 1991)?
- Impacted Whole World: The 1991 crisis was a domestic crisis induced by global factors, but today’s economic situation is unprecedented in its ubiquity, scale and depth
- Impacts Behavioural Mindset: The fear and scare factor among citizens was not prevalent during any of the previous recessions.
- Unparalleled Response: The COVID-19 shock also has this unique feature which is the response to the shock itself, that is, the virus control and social distancing measures represent a physical constraint on economic activity.
- Domestic & Global Economic Recover interlinked: India is much more integrated with the rest of the world now. In this pandemic, the global economy is severely dented and that will be a big cause of concern for India
What Steps need to be taken to arrest economic crisis?
Former PM Manmohan Singh provides for ‘three steps’ to stem India’s economic crisis
- First, the government should ensure people’s livelihoods are protected and they have spending power through a significant direct cash assistance.
- Second, it should make adequate capital available for businesses through government-backed credit guarantee programmes.
- Third, it should fix the financial sector through institutional autonomy and processes
What are the Challenges with the above steps?
- With tax receipts plummeting, it will be difficult for a cash-strapped government to be able to get the money to fund direct transfers and provide more capital to ailing banks and credit to businesses.
- In order to overcome the challenge, Former PM Manmohan Singh advices Higher borrowing (from external sources like World Bank & IMF)
- He says that even if India has to spend an additional 10% of the GDP to cater to the military, health and economic challenges, it must be done.
- The problem with higher borrowing is it will increase India’s debt to GDP ratio. Since this is crisis period, former PM says that increase in this ratio will be worth it as it can save lives & boost economic growth
Is taking loans from global institutions considered a sign of India’s economic weaknesses?
- In the past (1991 BoP Crisis), taking loans from multilateral institutions like the IMF and World Bank have been taken as signs of India’s economic weaknesses.
- But now India could borrow from a position of strength, compared to other developing nations
- This is because India’s track record as a borrower from multilateral institutions is impeccable. Hence borrowing is not a sign of weakness
- Therefore, Indian government must not be shy of borrowing but it must be prudent on how to use that borrowing
The previous crises were macroeconomic crises for which there were proven economic tools. The present crisis has induced fear and uncertainty in society, and monetary policy alone as an economic tool to counter this crisis is proving to be blunt.
Connecting the dots:
- Direct Monetization of Deficit: Merits & Demerits