FM Nirmala Sitharaman: The economy is a big challenge but we are up to it
India is currently caught in a deadly pincer. On one side is the burgeoning health crisis and on the other is the precipitous decline of the Indian economy. Both are humanitarian crises. One is a matter of life and death, and the other of livelihood. They are closely connected. There is nothing worse for an economy than uncertainty. The trajectory of the virus is really an unknown, and the economy remains in the shadow of uncertainty of when it will be shut down partially or totally. Unfortunately, the Indian economy had been in a secular decline since the third quarter of the 2016-17 financial year— when it began its slide from 8.6 per cent to 4 per cent in the final quarter of the financial year 2019-20. That was about the time the pandemic struck, pushing India into a 68-day lockdown at just four hours’ notice on March 24. Many experts attribute the four-year pre-pandemic decline to the demonetisation of 86 per cent of India’s currency on November 8, 2016. It was followed by a complicated and hastily implemented GST (Goods & Services Tax). The banking system was already riddled with massive loan defaults. The government maintains that this decline was cyclical. The problem was that when the pandemic hit, the Indian economy had no cushion and the government found itself facing a double whammy.
New government numbers present an even grimmer picture of an economy in the ICU. The economy contracted by 7.3 per cent in the previous financial year. This is the first full-year contraction of the Indian economy since 1979-80, when the GDP shrank by 5.2 per cent. The faint glimmer of hope in the fourth quarter of FY21, when the economy grew at 1.6 per cent, was crushed by a deadly resurgence of the pandemic in April this year. The second wave, which the government completely failed to anticipate, battered businesses, left millions jobless and dragged many more into poverty. Shutdowns and layoffs in factories have pushed unemployment levels to a new high. According to CMIE (Centre for Monitoring Indian Economy), the labour force shrank by 1.1 million while those looking for work and unable to find any expanded by 6.2 million—from 27.7 million in March to 33.9 million by April. Lockdown restrictions led to the loss of nine million salaried jobs between February and April this year.
Investment firm Barclays estimates India lost over Rs 58,000 crore every week through May as 98 per cent of the country remained under lockdowns. All three major sectors that provide job opportunities in rural India — agriculture, construction and small-scale manufacturing — have collapsed. In agriculture, commodity prices are falling while input costs keep rising. Private construction, a big employer, is at a standstill.
Continued financial distress is pushing more people down to the bottom of India’s economic pyramid. A research report by the US-based Pew Research Center in March revealed that the pandemic pushed nearly 32 million Indians out of the middle class despite the parameters defining the middle class being quite low—those earning between $10 (Rs 724) and $20 (Rs 1,449) a day. Before the pandemic, India’s middle class numbered 99 million people. A year later, it is just 66 million.
Never in the recent past has the need for economic growth been as urgent as it is now. Especially as people are being hit by the double blow of unemployment and growing inflation. Fortunately, we seem to have crossed the peak of the second wave. Hence, it is a good time to look at what needs to be done to kickstart the Indian economy. The government’s bold budget this February boosted spending on infrastructure and healthcare and also announced welcome proposals for privatisation, disinvestment and asset monetisation.
For our cover story this week, Group Editorial Director (Publishing) Raj Chengappa and Business Today Editor Rajeev Dubey interviewed the Union Finance Minister Nirmala Sitharaman. Entrusted with the unenviable task of reviving the economy, Sitharaman exuded confidence. A lot of the measures to deal with a post-Covid economy, she says, are already in place. Executive Editor MG Arun and Deputy Editor Shwweta Punj look at the ways in which we can get the economy going. The consensus from business and industry is that the government further increase its spending, if necessary by printing more money and putting more cash in people’s hands to stimulate demand. Private consumption expenditure constitutes 55 per cent of the GDP, and unless it is boosted urgently, the chances of the economy coming back on track will remain poor. The budget this February stated that it will spend Rs 34.8 lakh crore as against Rs 34.5 lakh crore in 2020-21. This is an increase of a minuscule 0.95 per cent, which doesn’t inspire the confidence necessary to spur private demand. Perhaps some revision to the last budget is needed.
Next month marks three decades since the historic 1991 budget, which signalled the start of India’s economic reforms. Our Board of India Today Economists (BITE) urges that the government initiate more direct transfers to individuals. While addressing the pain, they call for the government to use the opportunity to launch long-overdue fundamental reform. Our experts recommend handing out stimulus packages and immediate relief to retail, hospitality and MSMEs, sectors which are the biggest employers. They advocate measures to support the severely affected urban poor, upgrading rural health infrastructure, scaling up MNREGA allocations to bolster employment generation, protect livelihoods and stave off hunger among the rural poor. They endorse bold agricultural reforms of replacing MSP schemes with an income support programme.
The government has a tremendously arduous job ahead of overcoming the pandemic and reviving the economy. It is a race against time. The only way to avoid another health crisis, which is usually followed by an economic one, is to fix its floundering vaccination policy. It needs to vaccinate as many people as it can to control the spread of the virus and lift the pall of uncertainty hanging over the economy. Given the right stimulus, the economy can start humming again without fear of being brought to a halt. The Indian economy, like Indians themselves, is resilient, and we can emerge from this economic abyss provided the government acts with audacity and clarity.
(India Today Editor-in-Chief's note for the cover story for June 14, 2021)
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