Gross Domestic Product (GDP) has been a sacred term ever since Simon Kuznets popularised it. The coronavirus pandemic has wreaked havoc throughout the world. India is no exception. We need to get our economy back on high trajectory GDP growth. From here on, how will the economic recovery look like? There are four drivers of an economy — consumption, investment, expenditure and trade.
Consumption
India’s economy is predominantly driven by private consumption. It is estimated to contribute to 50% of the GDP. To elaborate it further, nearly ₹30,000 Cr is spent every day by private individuals and firms to purchase goods and services (automobiles, FMCG, etc.). In the last 3 months, this has shrunk to a negligible figure as shops and factories were shuttered and consumers were in a lockdown.
Way ahead: To revive private consumption, consumers need more money in their pockets. This can take the form of direct cash transfers to the vulnerable sections and income tax cuts for the middle-class.
Investment
Investments infuse resources into an economy. They are required to create assets and expand the production of goods and services. However, compared to a peak of 35–39% GDP in the mid-2000s, investments have fallen to 29% GDP in recent times. From the government side, investments have been anaemic due to resource shortage. Private sector investments have been hobbled by red tape, infrastructural deficiencies, NPAs in the banking system, regulatory hurdles, complex legislation, weak contract enforcement, among others.
Way ahead: The business ecosystem needs to be fixed with appropriate reforms in land and labour laws, improving the efficiency of our judiciary, easing FDI norms (E.g. 100% FDI in multi-brand retail), reforming archaic legislation, strengthening infrastructure and fixing the banking system.
Expenditure
In India, expenditure is majorly driven by the government. However, expenditure can only benefit the economy when it is productive. The public expenditure must be productive and beneficial. Recently, MGNREGA was allocated an additional ₹40,000 cr. However, for it to have salutary effects, it must be used for the creation of productive assets.
Way ahead: A public works programme similar to the New Deal of former U.S. President Franklin D Roosevelt will not only result in the creation of productive assets but will also create employment for the vast populace.
Trade
The prospects for trade look bleak at this moment. The entire world is in a slowdown. However, there are green shoots visible, especially in merchandise trade. Firms are moving out of China as its manufacturing is moving higher up the value chain. Its labour is also getting more expensive. Furthermore, the pandemic has shown the world how reliance on a single country is unwise.
Global merchandise exports at nearly $20 trillion offer great potential. In apparel, Chinese exports which were $175 billion in 2015 have dropped below $150 billion. Countries like India and Vietnam can capture the vacated space as observed by economist Arvind Panagariya. India needs to act now; otherwise, as a political commentator observed, the present generation of Indians may see Vietnam become what the previous generation saw China become. That would be truly tragic for India.
Way ahead: Reduce import tariffs to facilitate more significant trade besides signing free trade agreements (FTAs) — RCEP, India-EU FTA and an agreement with the U.K. as it leaves the E.U. Improve business ecosystem in the country — policy certainty, better factors of production, robust infrastructure, etc.
The economy will certainly recover from the temporary shock and dislocation caused by the pandemic. The question is — what will be the nature of recovery? U-shaped or W-shaped or V-shaped? The answer may depend on how aggressively we carry out the reforms discussed above.
Note: Mourya Krishna, views expressed are his personal. You can reach the author on Medium.