Recovery takes more than reforms

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Syllabus: GS 3

Synopsis: The focus must be on food supply and not money supply for economic recovery.

Introduction 

The recent growth estimations of the National Statistical Office show that after a contraction in the first quarter of last year, growth accelerated gradually afterward. This would have assured a recovery if the second wave of the pandemic didn’t hit the country.  

• Overlapping State-level lockdowns had an impact on the economy. Production must have contracted at the beginning of this year. That’s why recovery could be W-shaped rather than V-shaped.

Explain the potential of reform measures in bringing about an economic recovery.

On the issue of economic recovery, a minister stated that the economy will recover due to the reforms planned or already implemented by the government. However, one doesn’t know how much the reforms can make a difference at this stage.

• Firstly, the term ‘reforms’  is used for policy changes that remove limits on private sector activity in certain areas and those that increase profits in existing lines of production since 1991.
  • For example, allowing greater private sector participation in defence as part of the Atmanirbhar Bharat Abhiyaan launched in 2020 and the major lowering of corporate tax in 2019.
• Secondly, more reforms may be futile in driving recovery. The private sector’s entry into a new area or investment in an existing activity may not be profitable, as their revenue will depend on the state of the economy in the near future.
• Thirdly, in February, after the peak, the government returned to its principal macroeconomic pre-occupation, i.e. fiscal consolidation or the paring down of the fiscal deficit. It raised its cost outlay by less than 1% in the last Budget. However, the second wave of COVID-19 threw the economic policy calculations.
• • Keeping public expenditure unchanged with a possibility of further contraction of the economy. This fiscal stance would be disastrous.
• Fourthly, data from the Centre for Monitoring Indian Economy displayed that unemployment has risen in May, showing less demand for output. The private sector is aware of this and is unlikely to respond with enthusiasm to relaxing reforms.

What should be done?

• Increasing public spending is the only option left to the policymaker serious about bringing on a recovery. We need to accept a higher than budgeted deficit.
• A debate including economists and central bankers has been set off on whether the government should now ‘print money’. This is the wrong way to approach the problem. It is also alarmist. The objective is to revive the economy, public spending is the tool and the funding must be found. It need not involve money creation.
• Debt financing remains an option as India’s public debt is low by comparison with the OECD countries. Even if money financing is adopted, it won’t cause accelerating inflation as some expect. Experience in India suggests otherwise. 
  • However, studies do show that any economic expansion would be inflationary if the production of food does not respond sufficiently.
• The focus must be on the food supply and not the money supply, in any serious attempt at economic recovery.