7 PM Editorial |Sustainable Economic Recovery by Instilling Confidence in Stakeholders|3rd August 2020

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Sustainable Economic Recovery by Instilling Confidence in Stakeholders

Introduction:

COVID 19 pandemic has brought economies to a standstill. Global and domestic GDP is estimated to contract along with loss of employment, reduced investments and reduced trade. This reverses decades of progress on development and pushes many into poverty. Education and nutritional outcomes are bound to suffer due to reduced incomes. To control the damage to the economy and development, governments must act with haste by understanding underlying sentiments.

In absence of a vaccine or cure, fear of infection and death has deterred reopening of the economy in full scale. In such uncertainty, people cannot spend and firms cannot reopen production. These negative sentiments due to pandemic must be tackled to revive the economy in a sustainable manner. Monetary, fiscal and policy responses must address this anxiety and uncertainty to ensure effectiveness. Confidence must be brought back to all stakeholders – people, firms, financial institutions, international development organizations and ratings agencies.

Cash transfers needed for security of households:

Due to loss of livelihoods and incomes, MGNREGA is being sought by more people. Demand has trebled after lockdowns and reverse migration from urban centres. But it is not enough to address income anxieties of households as it has low wages and only 100 days of work.

In such a scenario, adequate cash transfers are needed to provide a sense of security and confidence to households. It can address basic needs of the households like food, sanitation, healthcare.

This has been opposed by apprehensions that it can deter people from going back to work and hence produce labour shortages. But evidence in the USA shows that it is not the case. Hence cash transfers to vulnerable households must be undertaken to inject confidence in households. This also acts as a demand generation tool in the economy which is needed for firms to reopen.

Autonomy to financial institutions for improved confidence:

Monetary and fiscal responses by India include credit expansion, credit guarantees and interest rate reductions for liquidity. But such supply side measures are not successful in an environment of uncertainty as banks become reluctant to lend.

In such a scenario, autonomy of financial institutions – RBI, banks, regulators, bankruptcy institutions – is crucial in instilling confidence in financial processes. Only then can banks lend with confidence.

Revival of firms:

When people have money to spend due to cash transfers and banks can lend capital, then firms will be more confident in reopening and investment. Hence cash transfers and autonomous financial institutions are needed to revive firms.

Other supply side steps like corporate tax cuts and trade restrictions will not be effective. Tax cuts will result in firms hoarding money due to uncertainty and also will reduce government revenues. Trade restrictions will lead to disruption of supply chains where Indian firms are involved and also can result in trade wars where other countries will restrict Indian exports.

Hence cash transfers and autonomous financial institutions are better policy options.

Need for more government borrowing:

To implement steps of cash transfers, credit guarantees, liquidity infusion in banks, fiscal resources must be available with the government. Excessive fiscal restraint will be harmful in the current economic downturn. Hence the government must borrow more to provide a stimulus to the economy.

Sources of financing fiscal deficit include:

• International development institutions like IMF, World Bank. They have constituted new instruments of borrowing for developing nations. These must be availed.
• Deficit monetization(RBI printing money to finance deficit) as last resort. This must be done with prudence to prevent negatives of such measures like inflation and wasteful fiscal expenditure.
• Disinvestment in non strategic PSU’s

Conclusion:

Underlying problem of lack of positive sentiments in the economy must be addressed for sustainable economic recovery. By instilling confidence in households(people), financial institutions, firms, we can provide stimulus towards a positive growth cycle. This will provide confidence to sovereign credit ratings and international development agencies, which inturn will enable more funding assistance to India.

Source: https://www.thehindu.com

Mains question:

1. Demand side interventions and confidence in the financial sector is needed for reviving economic growth post pandemic. Discuss?[15 marks, 250 words]