November , 2020
Why recession in India will last long
11:56 am

Rajiv Khosla


In the run-up to Dussehra and Diwali, Nirmala Sitharaman, Finance Minister, Government of India, made big announcements to boost the economy and revive demand. The announcements ranged from LTC cash vouchers to central government employees, a festival advance of `10,000 and 50-year interest-free loans of `12,000 crore to the states to offer respite to the ailing economy. Though these minuscule steps will not go far in stimulating demand, yet these efforts undertaken by the government are commendable. All the government's efforts to recover from the pandemic were hitherto directed towards opening the windows of loans, providing guarantees for these loans and coining new schemes to provide cheap loans. For the first time, the government has taken measures to transfer cash directly into the pockets of the consumers.


There is no doubt that only 48 lakh central government employees will be directly benefited from these announcements and yet these moves are better directed vis-a-vis the efforts made earlier. Even if the employees working in Public Sector Units (PSUs) and Public Sector Banks (PSBs) are also considered for the disbursal of benefits along with the central government employees, there would not be much change in demand as the number of such employees hardly exceeds 10 million. Beneficiaries will have to purchase up to three times the amount of LTC claimed by March 31, 2021 and that too for goods falling in the GST bracket of 12% or more. This will transpire into an increase in demand for consumer products such as TVs, washing machines, refrigerators, vacuum cleaners, tables, sculptures and other items which will give some impetus to production, investment and employment in the industrial sector and ensure GST revenues for the government.


Spokespersons of opposition parties rued that the aviation, hotel and tourism sectors remained the hardest hit by the pandemic and these efforts by the government will further rub salt to their miseries. Though these arguments carry substantial weight, yet some contentment should come in the sense that the government has now acknowledged that recessionary conditions cannot be tackled by servicing the supply side only and by ignoring the demand side. Needless to mention that the Indian economy is in a deep recession because of the vague, insensitive and flawed policies of the central government. Also, it will take longer for us in comparison to other major countries of the world to recover from this recession. An analysis regarding why it will take longer for us to recover from this problem is carried out in the following paragraphs.  


Wrong diagnosis of the problem


At the outset, the government's assumption was that just as the battle of Mahabharata was won in 18 days, by imposing a strict lockdown of 21 days - with all economic activities paralysed – the war against coronavirus can also be won. This was absurd and illogical. Nowhere in the world had such a drastic lockdown taken place. Further, wherever lockdowns were declared in the selected zones, views of policy makers, industrialists, trade union representatives and the general public were duly called and cared for. However, in India, we formulated the lockdown strategy keeping ourselves confined to four walls and almost without consulting anyone. Besides, we also implemented the complete lockdown strategy without analysing its adverse effects. Accordingly, today we are standing amidst a severe recession with high unemployment. With all economic activities coming to a standstill for 21 days in March and April this year, workers in both the formal as well as informal sectors along with self-employed persons and businessmen started feeling the heat. Data released by the Centre for Monitoring Indian Economy (CMIE) highlighted that nearly 12.2 crore workers lost their livelihood due to the lockdown and many workers who were working in cities or urban areas were forced to migrate back to their villages - owing to high cost of living in urban areas.


In order to set the things right, we desperately focused on providing cheap credit to the people instead of taking such measures that ensure that workers are not thrown out of their jobs. When governments worldwide were talking about job security of the workers, we were busy opening the windows of cheap credit to keep our economy afloat. Australia's - Job Keeper, England's - Furlough, Germany's - Kurzerbeit, France's - Activite Partielle, the US’ - Pay Check Protection and Italy's - Short Time Work are some of the schemes that saved about 50 million jobs in the Organization for Economic Co-operation and Development (OECD) countries. In addition to these job security schemes, local governments in these countries (to keep up the demand) also provided a variety of allowances for the self-employed and unemployed workers. As we ostensibly failed to understand the magnitude of the problem and tried to cosmetically overcome it by offering cheap loans, demand decreased in the economy and businessmen could not reap the benefits of the cheap loans. The days are not far off when the rest of the world will experience a 'V' shape recovery and will be on growth spree but we shall be repenting upon the efforts made late.


Unnecessary compromising attitude


The Goods and Services Tax (GST) that the present government rolled out on July 1, 2017 at the historic Central Hall of the Parliament by terming it as India's biggest tax reform has now turned out to be the biggest problem for the government. Leading economists like Dr. Manmohan Singh, Raghuram Rajan and Amit Mitra believe that GST - in its current form - is incapable of producing tangible results. By and large, the economists believe that the main reason for the poor performance of GST is the presence of four tax slabs instead of one. In addition, about 30% of the commodities like petrol, diesel, liquor, etc. are outside the ambit of the GST. Further, the state governments have transferred most of their powers to levy taxes to the central government. In turn, the central government has agreed to compensate the states at the rate of 14% for any shortfall in revenues the states experience till the year 2022. This compensation is to be realised by the central government by levying a cess on the GST amount. Thus, from the very beginning, GST has become a bundle of compromises and about 500 amendments have been made so far.


The economic performance and political consensus among governments are the two important pillars that have kept the spirit of cooperative federalism as well as GST alive. But the economic performance that was weakening for the past three years or so, got severely affected by the declaration of a strict lockdown and that led to dwindling political equations among the governments. Political consensus deteriorated to such a point that few state governments decided to knock the doors of the Supreme Court over the non-receipt of the agreed compensation from the central government. To control the situation, on one hand, the central government postponed the decision to levy cess on GST indefinitely (earlier it was till 2022) and on the other hand, it struck an agreement with the states to provide them with loans at cheap rates through the Reserve Bank of India. This arrangement of providing loans to states for the time-being and indefinitely putting off the compensation cess beyond 2022 means that the central government has postponed the compensation condition to the state governments even beyond 2022, besides letting the businesses and people share the burden of cess for a longer period. Such political manoeuvres are expected to create obstacles for the states in incurring capital expenditure, which will result in the persistence of unemployment and keep recessionary conditions alive in India for a longer duration.


The central bank ringing alarm bells


The Reserve Bank of India (RBI) acknowledged for the first time in October 2020 during its monetary policy release that India's GDP growth rate will be -9.5% in 2020-21, although international institutions and rating agencies are forecasting India's GDP growth rate to be in between -12% and -14% in the financial year 2020-21. Astonishingly, the RBI also announced its historic decision to buy the bonds of state governments due to weak economic activities. This decision of the RBI speaks volumes about the state governments’ empty coffers. In this scenario, the combined fiscal deficit of the central and state governments is expected to be almost 14% or more - which would spoil India's image with the international rating agencies. To improve the image, our government will restrict public spending in future, as we had been doing in the past. This reduction in public spending will further delay India's recovery from recession.


If the government, at this juncture, apart from its traditional ways of reducing public spending and taxing the general public, takes such steps that could increase the disposable income of the general public, this extraordinary situation can then be mitigated amicably. The present circumstances are exceptional and demand special steps to be taken by the government to counter it.


---Dr. Rajiv Khosla is Associate Professor in DAV Institute of Management, Chandigarh

The opinion/s expressed in the article are that of the author’s and do not necessarily represent or reflect the policy or position of this magazine.


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