Key to turning around the economy

Following the excruciating whip of the coronavirus, knee-jerk lockdowns have taken the Indian economy to a new low, with the overwhelming contraction of 23.9% (constant prices) in the 1st quarter of FY2020-21. India has had one of the toughest lockdowns in the world and considering that the contraction of 23.9% appears to quite conservative. Also, in the aeon of physical distancing, it might have been an arduous job for the NSO to carry out an extensive survey across the country.

Nevertheless, with all due respect to the officers and members of the National Statistical Organization, I drew some sensible conclusions. Peripherally, even a layman can jump to the conclusion that the fundamental ailment associated with these unprecedented circumstances is the strangulation of consumption or demand. But consumption has had been an issue with the economy since 2016. Apart from this, there are other latent factors that have contributed to the contraction of the Indian economy.

So, let’s dissect, shall we?

The climacteric of the story started on 8th November 2016. That was the day when the roaring Indian tiger was tamed with the exclusion of the fiat currency from the system. The informal sector was shaken to the core by this sudden shock of demonetization. In 2017, another big blow greeted the economy in the form of a patchy GST framework whose failure would later be known as an act of God. I would not dwell on it at great lengths, for we all know how these seemingly structural reforms metamorphosed into structural ailments for the Indian economy. With the wounds inflicted on the economy by the demonetization and the GST, we entered the era of COVID.

Without giving a second thought, the nation adhered to the idea of a nation-wide lockdown, which at that point of time was an obvious choice. The lockdown was indeed stringent, but porous. One segment of the population was kept at home, while the other was travelling on foot all the way to their home, and nobody had anything for them. And that porous lockdown failed the entire lockdown, and in the end, the authorities had to opt for micro-containment, which they are still following. Given this reality, no one can overlook or simply play the blame game for the inevitable shrinkage. The contraction was imminent but the overarching question that outstrips the inevitability of other things is how quickly can we get out of the ravaged economy.

Given the trajectory of the GDP in the last 4 years, it is easy to conclude that the government is running out of money. The paucity of funds has augmented the possibility of a sovereign default evident by the inability of the Government to pay the GST surplus to the states. Apart from the sovereign default, the Centre is on the verge of committing a constitutional crime by violating the religious framework of the Goods and Services Tax. On the other hand, to fortify the avenues to provide credit to the needy people, a deceptive package of Rupees 20 lakh crore was put forward, which constituted less than Rs.2 lakh crore contribution by the Centre. Till now, the relief measures taken by the government have not been deservedly effective.

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The need of the hour

In my opinion, the orthodox and conventional methods will dramatically fail at providing major breakthroughs to the economy. The Finance Ministry really needs to pull its socks up, otherwise, it could cost us decades for this mismanagement. The economy needs greediness, not stinginess.

Give them coupons, if not money

The Centre has to step in and put money in the hands of people to energize the animal spirits in them. When it comes to putting money in the hands of people, DBT is a viable mechanism. One of the worries regarding a mechanism like Direct Benefit Transfer is that even after throwing money, there’s no guarantee that people will spend, they simply don’t have the reason to go for discretionary expenditures. For that, I have an option, give them coupons or vouchers with a limited time to spend. If they hold that coupon for more than let’s 30 days, it will expire. By that people can be compelled to spend.

Monetization of capital

It may hurt the sentiments of people with chauvinistic mindsets, but as of now, it’s a viable option for the Centre to generate funds by selling out or leasing out its unproductive stakes. It will ease out the burden of borrowing; borrowing contributes to the Debt Creating Capital Receipt, which enhances the unwanted liabilities on the government.

The privatization of banks, which is being contemplated can also come to the rescue of the GoI. Again, it’s a hot topic and may not go well with some people, but the concept has strong empirical backing by various committees including the Nayak committee.

Levying cost-reflective power tariffs

The fundamental problem with the subsidy programmes run by the government is that they are not cost-reflective. People get subsidies in bulk, implies that the undeserving also get the same treatment. Especially, in the power sector where the DISCOMs are running at loss, subsidies are being provided to people in bulk. To tackle the trouble, the subsidies should be delivered in a selective way.

Market linked interest rates for small saving schemes

This is directly linked to the monetary policy of the RBI. The RBI has been very accommodative throughout the entire contractionary phase. But the process through which its decisions affect the economy in general, and price level, in particular (monetary policy transmission) has not seen much success. A reason attributed to that is high-interest rates offered by small saving schemes run by the GoI. These schemes need to be linked with prevailing rates in the market.

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The recovery from a negative territory will require a gut-wrenching effort and enormous amount of affirmative sentiments, not Panglossian narratives. It is our collective effort that can make us defy the impregnable crisis. And at the top level, we need domain experts, not incapable bureaucrats high on their bureaucratic marijuana. And once we decide to set the ball rolling, this too shall pass.