The battle against Covid-19 got a boost in the last week with the announcement of new milestones in vaccine development programmes. There is a strong possibility that early next year, vaccination will be rolled out. This development will add momentum to the ongoing normalisation of economic activity. The big policy question now is whether the government should continue to stick to just the economic initiatives already announced since the first lockdown. After all, high frequency economic indicators show clear signs of normalisation. RBI has also revised its economic forecast to announce that the ongoing quarter (October-December) will record marginal growth.
That however may not be the best way forward. A couple of points on the data need to be kept in mind. Boiling down trillions of economic transactions into one precise GDP number requires use of proxy indicators. Typically, the first take of GDP underestimates the impact of any massive adverse event on the informal sector. This is because the data is not easily discerned. There are other indicators that show the economy is not out of the woods. The combined impact of two years of economic slowdown and the Covid induced recession is unlikely to disappear soon.
To illustrate, the RBI consumer confidence survey for November showed that it remained very low as compared to a year ago. Not only has discretionary spending contracted, respondents expect it to shrink further in the coming year. Perhaps that partly explains why bank deposits are growing at 10.9%, way ahead of lending which is expanding at only 5.8%. This cycle can lead to prolonged stagnation. Investments to capitalise on supply side reforms announced by the government will be influenced by perceptions of the strength of aggregate demand. Both the GDP data and consumer surveys show that demand is anaemic. This calls for a change of approach.
The government should see the imminent arrival of vaccines as an opportunity to make one big effort to lift the economy out of its current hesitancy. There is a strong case for a fiscal stimulus by expanding borrowing and spending it on infrastructure. The government’s own assessment is that India’s lack of competitiveness stems from infrastructure constraints. If the government uses this opportunity to accelerate its infrastructure plans, it will feed into multiple contracts to the private sector. This will kick-start a virtuous cycle of revenue, job creation and eventually private investment.
This piece appeared as an editorial opinion in the print edition of The Times of India.
Views expressed above are the author’s own.
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