Income support to mitigate income losses

Context- The government’s unusual reluctance in providing adequate support to the economy has purportedly been because of the lack of fiscal space.

Is India in a technical recession?

Technical recession– The National Bureau of Economic Research (NBER) in the US defines a technical recession to be in progress when real GDP has declined for at least two consecutive quarters.

• However, the growth rate is measured on a quarter-over-quarter, not year-ago, basis.

According to JP Morgan’s estimates – On quarterly basis, India’s GDP India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20.

• This implies that India did not suffer two consecutive quarters of negative growth.
• Therefore, India is not in a technical recession.

What is RBI’s survey suggests to real GDP growth?

RBI latest survey of professional forecasters (SPF) has forecast that real GDP is expected to recover in FY22 to 12 percent from -9 percent in FY21.

• This implies that six quarters from now it will still be about 7 per cent below the pre-pandemic path, or $300-billion-a-year of income losses across two years.
• Concern- This can cause great damage to household and SME balance sheets, to income inequality, to poverty, and to women’s employment

What are the issues with government policy?

1. No income support– The income loss could have been mitigated by budgetary income support. However, the government chose not to provide this.

• Government consumption declined 22 per cent on a quarterly basis in 3Q.

2. Limited support to the domestic economy – Despite the apparent lack of fiscal space at home, the RBI has been funding other countries’ fiscal deficits.

• RBI invested almost 3 per cent of GDP in foreign assets just in the first half of this fiscal year.

3. India’s huge current account surplus is a bane– This reflected not economic strength but an economy imploding so much faster than others that India’s demand for imports fell faster than foreign demand for Indian exports.
4. Ongoing recovery led by capital than wages – Indian companies reported a decline in sales. However, operating profits growth was in the double digits. Net profits grew even faster. Large firms achieved this by slashing costs.

• A recovery led by profits will not lead to higher investment demand as long as there is significant excess capacity in many parts of the Indian economy.
• As far as the labour market goes, unemployment has dropped below pre-covid levels, but that is partly because of a decrease in the labour participation rate.

What is the way forward?

Government needs to provide extensive income support to mitigate the income losses due to pandemic.

• Government needs to be ensured that the recovery is not hamstrung by damaged household and SME balance sheets because of the extended loss of wages and incomes.
• Infrastructure spending and reforms are critical to sustain medium-term growth, neither can boost near-term demand.