The Seeds of Trouble and the Way Forward

The COVID-19 pandemic has had a devastating effect on India, a situation which was exacerbated by the central government’s hastily imposed lockdown. The verdict on the lockdown’s effectiveness in controlling the pandemic is yet to come out, but what we do know is that it severely crippled the economy. The Indian economy, still convalescing from the massive demand shock of demonetisation in 2016, has received a body blow as both demand and supply have been hit. 

The commentariat has thrown up a spectrum of estimates of the post-Corona economy, with figures ranging from 3-4% slow GDP growth to 0-1% stagnation to 1-2% contraction of GDP. These estimates themselves remain, for now, nothing more than informed guesses, as the scale of the effect of the lockdown on the economy is still being uncovered. Supply chains, now delinked, will not be able to start up immediately post the lifting of the lockdown. Labour shortages in urban areas will become the norm, while the corresponding surplus in rural areas — depressing wages further. As jobs are cut across the economy (in the presence of the meagre stimulus currently announced by the Centre), demand will take another massive hit. Meanwhile, as portfolio capitals take flight from India, the Rupee contains to fall and drives up debt servicing costs in Rupee terms. The domestic debt’ crisis’, combined with the RBI’s nudges, had led to higher external commercial borrowings, which will now begin to weigh heavily on Indian corporates. 

Such a grim scenario warranted an aggressive fiscal strategy by the Centre, which, unfortunately, has not been forthcoming. Out of the Rs. 1.7 lakh crore stimulus announced by the Centre, Rs. 70,000 crore was already going to be disbursed through the PM Krishi Sinchai Yojana and MNREGA wage rate revisions. Even an arch-conservative like Milton Friedman is said to have remarked that in times of crisis, “we are all Keynesians “. While a return to the post-war ‘Keynesian consensus’ is yet to take place, it is certainly true that many countries across the world have enacted strong fiscal and monetary measures (as the sight of Tory government nationalising the UK rail network will attest to). India, however, has lagged behind, with the aforementioned stimulus package amounting to only .55% of GDP effectively. The harshly and ill-conceived imposed lockdown, seemingly imposed without any forethought, has led to food shortages across the country, with India’s poorest regions seeing the return of starvation linked deaths. Without a place to stay or food to eat and faced with inadequate help from the Union government (or indeed, many state governments), a large mass of India’s migrant workers has chosen to walk back home, braving police brutality on a tortuous journey back home. Many have also died along the way, with the result being that the number of lockdown related deaths is keeping pace with the number of COVID-19 deaths. Food riots have broken out in certain areas, while communal tensions, already inflamed as a result of the BJP government’s policies, are being fanned, as BJP backed Hindu right-wing groups call for the complete economic and social boycott of India’s approximately 20 crores muslims. None of these factors portends well for any supposed recovery.

Migrants walking back to their homes. ANSA

The Roots of the Economic Rot

The Centre, as is its modus operandi, will use the pandemic as an excuse to cover up for their economic failures. However, while the Modi era has indeed seen a severe downturn (as a direct result of the government’s actions), there may be reasons to believe that the pre-Corona slowdown is structural. Though catalysed by economic mismanagement, the picture that emerged from the leaked NSSO Consumer Expenditure Survey report indicates a dire situation, especially in rural India. Mean household consumption (aggregate expenditure as well as food expenditure) has shrunk between 2011/12 and 2017/18. The recent economic shocks may have only been the tipping points, as years of stagnant real wages and agricultural output combined low rates of employment generation (during a high GDP growth period) have resulted in declining employment and increasing poverty (in aggregate terms) for the first time since Independence. Economists who once sang the Prime Minister’s praises are now forced to reckon with questions about how India will revive demand on a large scale, and, in the long term, fix structural issues. Before the Modi government came to power, India’s GDP growth was on a slow climb up from 5.24% in 2012/13, though there was no ‘V-shaped’ recovery unlike 2008/09. After 2014, it was beginning to stabilise at around 7-8%, though year-on-year growth was slow. Then came the whammy of demonetisation which, along with a badly implemented GST, wreaked havoc on India’s informal sector, which forms about 93% of the Indian economy.

As various NSSO reports show, India’s labour market suffers from at least three key problems: a) lack of an increase in formalisation, b) increasing informal sector linkages in the formal sector, and c) increasing contractualisation in the formal sector. In non-agricultural sectors, for example, between 2004/05 and 2017/18, the percentage of employees not eligible for paid leave and the percentage of employees without a written job contract increased from 46.2% and 59.1% to 54.2% and 71.1% respectively. All these workers worked in businesses where cash was king. Demonetisation caused large scale supply bottlenecks, which consequently caused a large drop in demand as many workers went unpaid, and people rushed to exchange their old notes. This effect was compounded by the introduction of the GST, which caused further cash flow issues, especially among the MSMEs.

What this shock did was to allow the floodgates to open. As GDP growth slowed, a myriad of issues began to manifest themselves. NBFC’s collapsed under the weight of bad debt, unemployment increased to historical levels (India witnessed its first decrease in aggregate employment since Independence), and poverty reduction reversed. To understand why this happened, we must take a slightly longer-term view. Post-liberalisation, the Indian economy went through many changes. The effects of these changes were diverse. For example, the 1990s were the first decade since Independence in which inequality increased in both rural and urban areas, a trend that has carried on till today. Between 1993/94 and 1999/00, India’s poverty headcount ratio fell by 3% at most, and in aggregate terms the number of poor increased. Another significant change since the 90s has been the large shift in spending from food to non-food items, even among the poor. This has introduced a disparity between income poverty metrics and nutrition intake metrics, with the former grossly underestimating the number of malnourished people in India. However, by far the most defining economic feature post liberalisation has been that of jobless growth, a ‘curious’ tendency wherein an inverse relationship has seemed to have emerged between GDP growth and employment growth. Some of India’s highest GDP growth periods (7.5-8% between 2004/05 and 2007/08) have also seen the most sluggish employment growth (0.17% per annum in the same period). 

Another emerging issue is what is known as the ‘middle-income trap’. Even post-liberalisation, the animal spirits are yet to be unleashed when it comes to per capita income. There is a reason for this as well. A lot of ‘pent-up’ demand was released post-liberalisation, which allowed for the high GDP figures we witnessed. However, given India’s poverty, the effective demand came from people from high-income groups, and so as this demand was exhausted, there was a danger of growth slowing. This led to the reckless borrowing and lending fueled growth that we witnessed in the 2000s, whose resultant NPAs are finally showing up on the balance sheets of banks. Stagnant real wages have also contributed to this ‘inequality in demand’, and in even good years, wage growth has not kept up with GDP growth. Marginalisation and then subsequent indebtedness in the agricultural sector is another issue. Already faced with stagnant productivity and meagre rises in production, agricultural growth has also been slow, while rural incomes have been depressed. In fact, unemployment has largely arisen out of rural areas, further dampening wages.

A larger appraisal is beyond the scope of this article, but what can be said with certainty is that even before the COVID-19 lockdown the economy was in the doldrums. Now, if one were to add to this mix the most stringent and poorly thought out lockdown in the world, coupled with woefully inadequate fiscal and monetary policy measures, one cannot but expect a crash.

A Way Out?

Any adequate set of countermeasures will involve two levels. The first set of measures will be for the period during and immediately after which the lockdown is in force. These will help provide succour to workers and stabilise the economy. The second set of measures will be for the period after the lockdown. These will help kickstart the economy once again.

During the lockdown, the Centre must first ensure that buffer stocks of rations held by Food Corporation of India are distributed to everyone, effectively universalising the PDS system. This will also free up storage capacity for enhancing procurement during the current harvest season. The currently announced additional PDS grants (an extra 5 kg of wheat/rice and 1 kg of pulses for the next 3 months) do not amount to much; increasing these allocations should be possible with the help of these buffer stocks. This will ensure that food security is secured for everyone, and social unrest is curbed. Aadhaar linkage of PDS must be halted, as many people have complained about malfunctioning point of sale machines. 

Next, the Centre must ensure that loan, debt and rent moratoriums are adequately enacted and implemented, especially in the informal sector. For small enterprises, the government may also have to consider subsidising wages directly. MNREGA wages should be boosted beyond the usual yearly revisions while pending dues must be cleared. Media reports suggest that most worksites have been closed due to COVID-19, with MNREGA work in March collapsing to 1% of the work available in February. This situation must be remedied, and the government must either find a way to restart these worksites with sanitation equipment in place or pay full wages to active job cardholders till these worksites are opened. The amount currently announced as cash transfers must also be increased, as the existing amounts are niggardly. The Centre and the states must work together to ensure that at least half of the minimum wage amounts are transferred per month. Additionally, most workers are not registered, and so efforts must be made to reach out this larger mass of workers (instead of sticking only to registered workers as the Centre is currently doing).

Post the lockdown, the Centre will be faced with no other option but to spend. The pandemic has exposed the ‘inefficiencies’ of private healthcare, and if India is to have a robust healthcare system, massive amounts of capital expenditure will have to take place. The production of medicines and protective gear will also have to be ramped up. Here, the Centre may want to consider a ‘phased nationalisation’ of healthcare, building on private sector capacity in the interim period. These will not only build state-owned capital assets that can provide healthcare at rates affordable to the common man but also boost employment, especially in the flagging construction and manufacturing sectors. Capacity building with regards to medical personnel will be imperative. 

Public spending will be one of the major source of activity post-COVID-19

Broadly, the Centre will need to boost its own spending on infrastructure building. Private investment had been falling well before the lockdown, so this will likely become a necessity. Cheap credit will also need to be provided for MSMEs. Meanwhile, agricultural spending will also to have to rise. Farmers will, at the very least, need specialised loan moratoriums, if not outright debt write-offs. One way to do this would be for the government to take on the debt of farmer (marginal to the middle), and have productivity-based interest or loan write-offs, which can be facilitated through Kisan credit card accounts. APMCs must take on a larger role, and government procurement of food stocks must be further boosted at C2 level MSPs. Indigenous seed production and R&D capacity must be built to provide seeds at cheap prices to farmers. Agricultural capital assets can be built through MNREGA work. Landless agricultural labourers must be provided with cash transfers and an enhanced social security net.

A natural question that will arise is how such a mammoth spending program will be funded. The Centre, in an effort to appease global finance capital, has taken many ‘pro-business’ steps in recent years, and the non-imposition of capital controls during the lockdown must be seen in line with this. To stem the haemorrhaging of portfolio capital towards the US, the Centre must consider imposing temporary capital controls for a period of up to a year. Of course, this will not be enough in and of itself. Stimulus packages such as the one proposed here are generally financed through a combination of increased revenue and deficit financing. The Modi government has given many tax concessions so far, but, as even a group of IRS officers recommended in their report recently, it may be time for them to bite the proverbial bullet and raise taxes once again. This will include both income and corporate taxes, while a wealth tax may have to be reintroduced (perhaps introducing it as a ‘COVID-19′ solidarity tax will help sell it better). This will help transform money lying idly as savings into productive capital. In any case, it was clear before the lockdown that the reductions in taxes had not resulted in increased investment (investors will not want to invest if they see demand deficits). Meanwhile, the RBI can begin to buy government bonds. Finally, the government must also be prepared to borrow. It is key here that the shackles of the FRBM Act are cast aside for both the Centre and states. The States are at the frontline of the immediate battle against COVID-19, and the 3% deficit limits imposed through FRBM are manacles that will greatly hinder the efforts of the states’ to combat the pandemic. States like Kerala have already taken the lead in asking the Centre to do sidestep the deficit limits. The pending GST dues to the states must also be cleared by the Centre. When the GST was introduced, the erstwhile Finance Minister Arun Jaitley is said to have promised to that the for the first five years the Centre would do all it could, including raising borrowings, to make sure the revenue of the states wouldn’t suffer due to any shortfall in GST collections.

Rohin Garg is an independent researcher.