Indian economy may need some more booster doses post-Pandemic

The question that one needs to answer is what needs to be done to revive the economy without creating inflationary pressures? With the given policy support till now, what is needed is the measures that could help address the supply-side constraints while also helping further revival in the demand side, opines NR Bhanumurthy.

Even after five months the struggle with Covid-19 continues and is only worsening with increasing count of cases and with wide spread effects, both urban and rural areas, across the country.

The economy, which faced a sudden stop due to severe lockdown, still limping to recover.

Although unlock process at the national level is almost complete, with local lockdowns in many areas and continued disruptions to some of the crucial sectors, the recovery process appears to take much longer time than earlier expected.

Like many other forecasts, the RBI, in its latest monetary policy announcements, also suggest that the GDP growth in the current fiscal year could be in negative zone although it raises some concerns on the inflation front.

Given such unprecedented situation, there were demands for government intervention through fiscal measures and also for the RBI’s support for the economy, which was slowing down even before the pandemic.

In terms of policy responses, various measures have been taken both by the RBI as well as Central and State governments.

Major part of these measures are included under the Atma Nirbhar Bharat package and is estimated to cost around 21 lakh crores, which is about 10 per cent of GDP.

However, there are some conceptual issues when the economists talk about the extent of fiscal support that has been provided till now and they differ quite widely in their assessments.

As it is under the Atma Nirbhar package, which is a broader package that includes some structural reform measures as well as some monetary measures, the additional outgo on the government expenditures are estimated to be just about 1.3 per cent of GDP.

This majorly contains the income transfer under PMGKY, increased allocation under MGNREGS, cost of free food grains for migrant workers among other minor support measures. But the actual fiscal support could be higher if one looks at it deeper (conceptually) and also wider (including states).

There is also a need for distinguishing between fiscal stimulus and fiscal support.

The Atma Nirbhar package is largely a broad-based policy support package rather than can be termed as a stimulus package.

For instance, the credit guarantee by the government for the loans to MSMEs, NBFCs, and Agricultural loans under Kisan Credit Cards is more of a fiscal support to banks that only affects the contingent liabilities of the government.

On the fiscal support, for the whole year 2020-21, as per the Budget estimates of both Centre and States together, the combined Budget deficit is fixed at 6.3 per cent of GDP.

However, due to pandemic and expected decline in the government revenues retaining such target could itself lead to higher borrowing, to the extent of revenue loss as against forecasts.

This, in our view, needs to be considered as additional fiscal support and government did increase its borrowing program by 4.2 lakh crore (2.1 per cent of GDP) even before the Atma Nirbhar package.

With the additional borrowing limits to the state governments (of about 2% although 1.5% is conditional on some specific reforms) and with 1.3% under Atma Nirbhar package, the overall fiscal support appears to be as huge as over 11.5% of GDP.

While some are conditional, at least it could be treated as fiscal support.

However, in the ultimate analysis, it is important that to what extent the governments are successful in borrowing from the market in the present circumstances.

Going by the recent trends, with huge support from the RBI, borrowing program appears to be smooth.

On the monetary side, the RBI has been undertaking accommodative policies through both rate cuts as well as liquidity support, which turns out to be to the tune of 8% of GDP.

While the monetary policy transmission in terms of rate cuts have dramatically improved recently, in our view, there is a need for more focus on credit channel.

In this regard, the recent measure to allow one-time restructuring of some of the stressed assets could help the banking sector to enhance the credit flow.

Despite these measures, based on forecasts of most of the respectable institutions, it is clear that these measures are not enough and some of the measures are meant for medium term to long term.

Indeed, some of us argued that while these measures could help revive the demand in the economy, supply side response could still be weak and restoring supply chains could take a longer time.

In such a situation, both fiscal and monetary measures could result in inflationary pressure in the economy.

From here, the question that one needs to answer is what needs to be done to revive the economy without creating inflationary pressures?

With the given policy support till now, what is needed is the measures that could help address the supply-side constraints while also helping further revival in the demand side.

Addressing the woes in the banking sector that has been struggling for the past few years, looking at some key sector specific measures especially in housing (construction), trade, transport, health, MSMEs, etc., and front-loading of committed transfers (GST and Finance Commission transfers) to the state governments are some of the measures that could help in reviving.

However, the timing of these measures (especially sectoral policies) are equally important as the pandemic could pose challenges in terms of its implementation.

And these measures do have some fiscal cost and the Centre may need to bear even if it means running a larger fiscal deficits in the current year.

On the RBI part, the focus could be on improving credit supply to the needy sectors and the sectors that has larger multiplier effects on both growth and employment.

In this regard, RBI’s recent decision to form an Expert Committee to prepare a blueprint for Resolution Framework of Covid-19 Related Stress should help in addressing supply side issues in the banking sector.

(N R Bhanumurthy is the Vice Chancellor, BASE University, Bengaluru. Views are personal.)