Arrest the Economic Slide

ECONOMY/ GOVERNANCE

Topic:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources
• GS-2: Government policies and interventions for development in various sectors

Arrest the Economic Slide

Context: Uday Kotak, the president of CII and MD of Kotak Mahindra Bank, has urged the government to provide another round of fiscal support aimed at protecting livelihoods, especially for the weaker sections of the economy. 

Issues

• Economic Recovery difficult: After 2021-22 Union Budget, India’s GDP was expected to recover all the loss it suffered in 2020-21, when it contracted by around 8%, and would grow by over 12% this financial year. Thanks to the vicious second Covid wave, India may not be able to get back to the level of absolute GDP it had in March 2020
• Disproportionate Burden on Poor: The second wave resulted in job losses and reduced wages across almost all income classes while making matters worse for the poor. 
• Reduced Aggregate Demand: In the wake of reduced incomes, people are expected to severely constrain their expenditures, especially on anything they consider non-essential. This would lead to depressed demand in economy
• Governments’ recovery strategy in danger: Depressed demand in turn, would delay, if not completely derail, the cornerstone of the government’s Covid recovery strategy — fresh investments from corporate India.
• Vicious Cycle:  Businesses will continue to hold back investments because there is not enough consumer demand, and consumers will not demand more because they do not have enough incomes. And this vicious cycle could get worse if the pace of vaccination doesn’t pick up or if there is a deadly third wave. 

Way Ahead

• Given the widespread devastation due to the second wave of Covid-19, this is not the time for either the government or the companies to look at their financial balance sheets.
• Only one economic entity can break this cycle: The government. By providing additional direct monetary help to the poor and extending its existing schemes for collateral-free loans to small businesses, the government can arrest the slide.