India better off than others currently but must do this to salvage credibility in financial markets
Such a large government stimulus comes with its own obvious trade-off of a high fiscal deficit and government debt.
By Dr Preeta George
At last, the much-awaited stimulus has arrived! A whopping 10 per cent of India’s GDP is indeed large enough to pump prime the economy. The common notion which was doing the rounds among many economists, industrialists and even academicians was that the Indian economy is beginning to slip into a deep crisis. It had already been on a slow growth path even before the coronavirus showed up. The poor implementation of demonetization and GST and then the deepening financial market woes represented by mounting NPAs were portrayed to be villains of the India growth story. Some sectors led by the auto sector were already heading downhill. With these grave pre-existing growth inhibitors, the pandemic is likely to create a very long term economic downturn. Such grave pessimism was also evident in sentiments surrounding the impending stimulus package.
Though at first there may appear to be adequate merit in leaning towards this view, it is important to wear an optimist’s hat for once. The government’s stance of converting diversity into an opportunity is a move in the right direction. There are ample reasons to believe that with this stimulus package, India is still better off as compared to most economies of the world and will be in a better position to wither the economic crisis created by the pandemic.
India’s internal market is an opportunity to capitalize on. The famous demographic dividend argument emphasizes immense opportunity in India’s growing middle-income group. But one might argue that with dwindling or no incomes how would this potential be realized? That is where the government’s role as an income and livelihood enabler comes in. The transfers to the underprivileged and most vulnerable segments and investments in projects for employment generation will trigger the benefits of potential markets and resources.
The development of agricultural infrastructure is also a suitable candidate for investment. It would not only help to reduce food wastages but also the resultant food inflation. According to the UNDP about 40 per cent of food produced in India is wasted because it doesn’t reach the market at all or on time. Besides solving this long term structural problem, such investments can also help achieve the short-term objective of rural employment generation. This is more relevant now given that rural unemployment is expected to increase in the near term on account of the return of a large number of migrant workers from cities.
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Such a large government stimulus comes with its own obvious trade-off of a high fiscal deficit and government debt. In recent times, the government has been overcautious about mounting fiscal deficits, guided not only by the resurrected FRBM targets in 2016 but also by the fear that any further escalation of the high debt to GDP ratio of 70 per cent can prove detrimental to the already fragile financial markets. According to the IMF, India’s government borrowing is estimated at 8.5 per cent of GDP if some off-budget finances relating to government enterprises and low tiers of government (state governments) are considered. The question about available fiscal space and related market turmoil is therefore inevitable in this context.
One possible solution for want of a better option during these rare and extreme times is for the government to provide for transparency on its stance relating to the fiscal stimulus and make timely disclosures of information about public enterprises. This will help salvage credibility in financial markets, according to the IMF.
Another related concern is the possibility of the twin deficit problem. With a higher fiscal deficit, will the Current account deficit be unsustainable? Given the fall in the oil prices in the international markets and a dip in India’s gold demand, the import side of the current account is well contained. Besides, with the weakening Chinese position in exports and inward FDI, India stands to benefit from being a close alternative for many countries in the world. For this India needs to focus on improving its export competitiveness.
The Commerce Ministry has already announced a two-phase export promotion plan in sectors such as electronics, medical textiles, gems and jewellery, auto components and pharma. In order to do so a great amount of funds would be required for capacity building and promotion activities. On the other hand, though India’s capital account openness has been increasing over the last few decades, it is still lower than in many countries in the world.
As per IMF’s fiscal monitor, the index of capital account openness is 0.14 when the median for low income developing countries is 0.43 and for high-income countries is 0.86. This index measures the extent to which inflows into the country are freely possible or unrestricted on major asset classes (1 indicates fully liberalized). The index of capital account openness on outflows is 0for India whereas the median for low income developing countries is 0.07 and for high-income countries is 0.89. This points to a comparatively lesser vulnerability of India’s external account to a shattered global economy. A low integration to international financial markets is what saved India at the time of the US Financial Crisis of 2008 and will save us even now. Added to these, a more focused path towards overall structural reforms including infrastructure development and amendment of land and labour laws will attract more foreign direct investment into the country. It’s time to be positive and look forward to better days ahead.
Dr Preeta George is the Professor of Economics at the Bhavan’s S.P. Jain Institute of Management and Research. Author’s views are personal
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