Recovery analysis that points out what India got wrong

Source– The post is based on the article “Recovery analysis that points out what India got wrong” published in The Hindu on 18th October 2022.

Syllabus: GS3- Indian Economy

Relevance– Effectiveness of government interventions to deal with pandemic

News- The article explains the important insights provided by a recent World Bank report titled “Correcting Course”. It also measures the effectiveness of the fiscal package by the Indian government for post-pandemic recovery.

What are important observations of the report?

Poverty and inequality– It captures the impact of the COVID-19 pandemic on global poverty. The number of people living in extreme poverty rose by seven crore million in 2020. The global poverty rate rose from 8.4% in 2019 to 9.3% in 2020. This is the first time in two decades that the poverty rate has gone up.

Global inequalities have widened. Economic recovery has been uneven across countries.

Fiscal policy– The report focuses on fiscal policy as an instrument for dealing with crises such as the pandemic. Poorer countries were unable to use fiscal policy as effectively.

The report suggests three priorities for fiscal policy for post-pandemic recovery: (a) Targeted subsidies that benefit the poor (b) Public investment to build resilience in the long term (c) Revenue mobilisation that should rely on progressive direct taxation rather than indirect taxes.

How was the effectiveness of measures taken by the Indian government?

Impact on poverty-The World Bank report relies on the Consumer Pyramids Household Survey by the CMIE, in the absence of official poverty data since 2011. It estimates that 5.6 crore people are likely to have slipped into poverty as India’s GDP fell by 7.5% in 2020-21. The population below the poverty line in India stood at 10% in 2020.

Effectiveness of fiscal measures– The Fiscal stimulus package of 2 lakh crore was not aimed at consumption led growth. It was mostly focussed on supply side measures like credit lines and refinancing schemes to private enterprises.

Only important demand side measure was food aid through the Pradhan Mantri Garib Kalyan Ann Yojana.  PMGKY is currently estimated to cost about ₹3.90 lakh crore. However, India ranked 107th out of 121 countries in the 2022 Global Hunger Index. It demonstrates that food aid is not a long-term solution.

Through the pandemic and beyond, India persisted with the reduced corporate tax rate that had been announced in September 2019. According to the Parliamentary Committee on Estimates, the reduction of corporate tax from 30% to 22% cost the exchequer ₹1.84 lakh crore over the last two fiscal years. The CMIE report says that corporate profits have increased.

India has repeatedly increased GST rates on cooking and transport fuels. It has put a disproportionate burden on poor people.