It is now evident that the world is heading towards a recession more severe than the financial crisis of 2007-08. Early signs of recession started appearing last year with the global economic slowdown, the Sino-American trade war, and the recently started Russia-Saudi Arabia fuel price war.
Now, with the havoc created by the ongoing Covid-19 pandemic, a deep global recession becomes inescapable. It doesn’t require extensive research to suggest that the outcomes of this recession are going to be catastrophic — furloughs and layoffs, sharp rise in unemployment, stock market crash, the collapse of the oil price, increase in government debt, market liquidity crisis and the downturn in consumerism to name a few. Needless to say, India, too, will go through substantial economic turbulence.
Apparently, India did its best to prevent the crisis when it announced a nationwide lockdown of 21 days in March earlier than most other countries in the West and announced an economic relief package considering the economic hardships of a large section of the population, including migrants, workers from the informal sector, daily wage laborers, etc. While timely government intervention in the form of relief package worth Rs 1.7 lakh crore was the need of the hour, it was doubtlessly insufficient. Considering the grave economic situation the country is facing, it is imperative for the government to take corrective measures to lessen, if not avoid, the adverse effects of an upcoming recession.
Keynesian economics advocated expansionary fiscal and monetary policies during the recession. Expansionary fiscal policy, characterised by increased government spending and decreased taxation, should ideally raise aggregate demand and increase consumption. The idea is to inject spending into the economy during a recession when no one is spending and reduce spending and collect taxes when the economy is booming.
The fact that the two main components of GDP, namely private investment and consumption, observe a sharp decline, government spending assumes particular importance. When the private sector is unwilling to make investments, the government has to balance the economy and not letting it get into a downward spiral. However, the question here arises: how is the government going to take such expansionary measures at a time when keeping the fiscal deficit target of 3.5% itself seems challenging in FY21?
In such a situation, the expenditure revenue gap has to be financed by either printing of new currency or through borrowing. According to Swaminathan Aiyar,
“At this point, you should not be afraid of increasing the fiscal deficit several times. I would say just print money. The government should have extra borrowing financed entirely by the Reserve Bank of India printing money. The implementation of the same will be a once and for all to address a huge explosion of fiscal deficit.”
Indeed, it is not the time to think about the inflationary consequences of such an exercise. Desperate time, desperate measures.
We need to recall how China reacted to the global financial crisis of 2008-09 with its massive infrastructure investment programmes in order to stimulate its economy. China survived a recession triggered by the financial crisis, albeit with some negative consequences. But the fact is that fiscal stimulus grows and pays. At this moment, infrastructure investment, to a moderate level, is one thing India should stick to without a second thought. The creation of durable assets will aid in economic growth sooner or later. Needless to say, it must include social infrastructure investment.
The other part of the expansionary fiscal policy calls for decreasing taxes, which means households have more disposable income to spend. This will lead to increased consumption if everything goes right. The same exercise has to be done with corporates, along with the expansionary monetary policy, which typically includes lowering of interest rates by loosening of policy rates, open market operations, and changes in the CRR and SLR. The idea is to increase the money supply to stimulate aggregate demand. However, ensuring the effective transmission of monetary policy remains a challenge before the RBI.
India’s growth has been primarily driven by consumption. India has a substantial middle-income group base, which has the potential to spur demand at a time when everything seems to be going in the wrong direction. A consumption-led growth model can help revive the economy, provided that the government does what the need of the hour is.
Healthcare and education, discount retails, consultancy, FMCG, utility industries and personal services are some industries and sectors that thrive despite a recession. Efforts must be taken to ensure that they remain resource-efficient and are unaffected during the recession. It is equally important to improve infrastructure and seek prospects of exports in these sectors.
However, a majority of the industries, including hospitality, energy, tourism, automobile and steel industry, have already started facing the brunt of recession. It is evident in such a situation that the stock market can’t flourish. The government and businesses must not lose the trust of investors. After all, psychology plays a massive role in influencing decisions in stock markets. The negative image of our country’s business environment can’t make investors stay in the market for too long.
The International Monetary Fund has said that India and China are the only two major economies that will maintain a positive growth rate. China has been giving out relief packages ever since its economic slowdown began a year ago. It also began many income-generating programmes. Moreover, the country has increased its MSMEs’ access to loans. Therefore, both countries need a common front to confront this economic crisis. You can cross over turbulent waters of an ocean only when you hold the hand of someone who knows swimming.
In the meantime, businesses need to renovate their business models, reshape their approach and strategies, understand their market and consumers in the post-pandemic world, and re-engineer business processes. Businesses can improve their market share by efficient management of supply chains, such as diversifying suppliers to avoid supply shocks, proactive collaboration with suppliers, making inventory visible online, pre-ordering, working from home, etc.
Daunting challenges are ahead, but there remain opportunities too, one being infrastructural development. Infrastructural investment herein includes both Greenfield and Brownfield infrastructure projects. It will mobilise idle resources, create employment opportunities, stabilise macroeconomic scenarios, and improve productivity and growth. Keynes called it the ‘Multiplier effect’.
Also, low crude oil prices offer a strategic handle to India. It will undoubtedly enable the government to manage fiscal consolidation at a time when the burgeoning gap between expenditure and revenue is raising concerns over the viability of stimulus programmes. As long as the lockdown, entirely or partially, persists, the government should make use of this period by reshaping trade and manufacturing policies, investing in social capital, completing pending development projects, building infrastructure conducive for emerging technologies such as 5G and hybrid vehicles and refurbishing growth model that is in congruence with sustainable development.