FM’s hope of India emerging as a ‘global engine of growth’ seems more virtual than real

Almost everyone acknowledges by now that COVID-19 has broken the back of an already teetering economy. This crisis has brought into sharp focus the complete failure of the central government and its economic management in the last five years. Through dramatic and disruptive actions, first by announcing demonetisation, then by imposing ill planned GST regime and now by mismanaging COVID lockdowns, Government of India has brought the Indian economy into a technical recession, for the first time in the last 40 years.

Despite the continuous appeal by the state governments to allow the states to manage the COVID by determining when, where and how the lockdown should be imposed based on local circumstances, Government of India continued to exercise complete control on COVID management till about two months ago. As a result, we saw the mammoth migration of workers, of the proportions seen during the unfortunate partition of this country. More than one and a half crore migrant workers were stranded. With factories and workplaces shut down due to the lockdown, millions of migrant workers had to deal with loss of income, food shortages and uncertainty about their future. Many of them and their families went hungry for days. Thousands of them walked back home, with no means of transport. This has all been recorded for posterity.

The report card of this government has been very dismal on the jobs front too. As far back as 2017-18 unemployment rate had risen to 6.1%, first time in 45 years. Since then, unemployment rate has continuously been very high. From January to March 2020, 90 lakh persons were thrown out of employment (CMIE). In January 2020, even before COVID hit the country, unemployment rate was 7.22%, which rose to 23.52% in March. It fell to 7.43% in July thanks to MGNREGA. However, the unemployment rate is higher than it has been in many decades. Thirty-day unemployment moving average for the country on 20 December 2020 was 9.74% (CMIE).

For the year 2020-21, the economic outlook is very grim. Now there is a near complete unanimity that the economy will be contracting between 8-10% this year. IMF has warned of serious contraction of -10.5% of the economy calling it a “historic low”. ICRA, the rating agency, has forecast 9.5% contraction in the economy, never seen before. Once a shining example of vibrant democracy and dynamic economy and a powerful voice in the G20, India is now struggling to keep the economy barely ticking. From being amongst the three fastest growing large economies, India now ranks 23rd in the Economist magazine’s weekly index.

It is not that the country has not faced serious economic crisis in the past. Pulling back from the brink of economic meltdown, Dr Manmohan Singh as the finance minister, undertook major reforms and liberalized all fields of the economy in 1991. Rest is history. One had anticipated similar strong response from the central government.

To assist the central government in using the right policy instruments, various state governments did send in their recommendation fairly early in the game. Government of Rajasthan had asked, amongst other things, the central government:

(a) to provide income support to organised and unorganised industry/services, including tourism industry, and MSME which would encourage them to keep paying wages of the employees during the lockdown.

(b) Suspend the approval processes for transfer of CSS/CS funds to the states and transfer all budgeted amounts rapidly. This would allow the state governments to implement these schemes and create jobs.

(c) Suspend, on lines of Rajasthan MSME Facilitation Act, 2019, requirement of any prior approval under any central law to set up industry or service to allow start-ups, MSMEs and other industries to start investing for post COVID markets.

(d) Immediately open a Rs1 lakh crore interest free Ways & Means Advances window for the states. The interest paid by the state governments to the RBI gets transferred to the Government of India as dividend. There is no case for the central government to make the state governments pay for the profits of the RBI in times of crisis.

(e) Make Rs 1 lakh crore general purpose grant window for the states and immediately transfer it to the state governments to be able to manage COVID effectively.

(f) Central government should mobilise loan financing over and above the fiscal deficit target, which could be on lent to the states on concessional terms.

(g) The central government and the RBI should work towards restructuring the State Development Loans of the state governments and defer all interest and principal payment on the SDLs for a period of three months.

These measures would have infused enough resources with the state governments for them to be able to provide direct cash transfers to the poor, shore up industries, secure jobs and get demand and consumption up. This would in turn have pushed up the GDP growth, tax revenues and improved over all economic health making the states strong to deal with COVID more effectively. None of these measures were adopted and the results are there for all to see.

The packages of about Rs. 21 lakh crore announced to date are called Atmanirbhar package. Although the Government declared this to be a bold move, the chief India economist at Barclay’s has stated that based on their “calculations and assumptions”, the “fiscal impact on the budget will be only Rs 1.5 lakh crore (0.75% of GDP)”.

At a time when demand is dead, Atmanirbhar package aimed to push huge liquidity into the system in anticipation for a lot of takers for loans to start and restart businesses. What the policy makers seem to miss out on is the stark reality that when businesses are struggling to repay their existing debt, and can see no real return of consumption for quite a while, why would they take fresh debt? Atmanirbhar package is an admission by the government that each one must look after themselves, the government can’t do anything anymore.

India would never in a 100-years have seen a budget being made in a virtual manner post the pandemic and the country is set to be an engine of global growth, announced the finance minister recently. We hope and pray that the budget should not remain just that-virtual. With projected -10.5% growth rate, being an engine of global growth seems less real and more ‘virtual’.

(Dr Arvind Mayaram is a former Union finance secretary and currently Vice Chairman of Rajasthan Economic Transformation Advisory Council)