Indian economy on contraction voyage

Mahesh Chander Sudan

We, the people of India, are passing through a testing phase of life that has thrown challenge of survival on many accounts; our health care infrastructure failed us in saving many precious lives from CORANA virus despite low mortality rate of the epidemic, resultant closure of economic activities during pandemic brought negative growth, unemployment across the spectrum has touched abnormally high rate and above all the public borrowing has reached 89.3 percent to GDP breaking previous high record of 84.2 per cent in year 2003that makes India the most indebted major economy after Brazil and Argentina among the emerging markets. In south Asia, India becomes the most indebted country after Bhutan and Sri Lanka and worse off than Bangladesh, Pakistan and Nepal. Going by per capita terms, every Indian has a debt of $1,674 against Bangladesh’$748 and around $1100 in case of Pakistan. No doubt, we have reached this sharp rise of public debt due to GDP contraction and shortfall of revenues that resulted in a record rise in debt – GDP ratio. This additional borrowing during 2020 will raise interest burden of a minimum of Rs. 1.5 trillion every year for decades to come and it would resultantly bring reduction of resources for discretionary spending such as capital expenditure, which may have some impact on GDP growth.
The ongoing pandemic struck across the globe in Dec 2019 with first hit at Wuhan, China. It thereafter progressively enlarged its infectious stroke and covered almost all countries of the world. A critical analysis of the trajectory of growth shown by Indian economy since year 2016 conveys that it started sliding downward well before the onset of pandemic due to certain policy decisions of the Government and cannot be assigned in totality to pandemic. It is felt to certain extent that two headwinds that stuck economic growth of India are demonetization and GST (Goods Service Tax)though these are considered politically bold and remunerative decisions of the present dispensation. Demonetization of currency was implemented in the month of Nov 2016 with an aim to arrest circulation of black money in the market that would curtail shadow economy and reduce use of illicit and counterfeit cash to fund illegal activities and terrorism whereas GST got introduced in the month of Jul 2017 primarily to widen the tax base and increase collection of taxes by the Government. These two decisions of the Government however missed their targets and gradually pushed India into economic slowdown of 2019.
It is seen that the growth rate of 8.26% in year 2016 mercilessly slipped down to -7.3% in 2020 with 7.04% in 2017, 6.12% in 2018 and 4.2% in 2019. Indian economy was judged as one of the fast moving economies of the world couple of years ago but it could not isolate herself from global slowdown much longer. Looking at the causes of present slowdown of the Indian Economy it is felt that policy decisions made by our Government in the recent past proved critical and these structural changes impaired economic growth seriously. Demonetization affected demand and supply dynamics of the economy, collapsed demand and raised bottlenecks for supply chain, dried up cash availability hurt functioning of small and medium businesses, withheld investments in these SMEs due to cash crunch fallout of the demonetization. Role of nation vide roll out of GST (Goods and Service tax) in contributing towards slow down cannot be ruled out. The process of migration to GST network proved cumbersome and it discouraged small and medium enterprises initially that possibly hurt their performance. It is said that the implementation of GST also proved flawed thereby exacerbating some of the factors that have contributed to the slowdown. Global slow down prevalent during the said period also affected economy due to slump in the export and reduction in Foreign Direct Investment. Besides these prominent factors there were other issues like high Nonperforming Assets (NPAs) of the nationalized banks, structural shift of the economy from cash driven to digitally enabled status. On the onset of pandemic and prolonged lock downs across India, the criticality of the economic slowdown further worsened to impact Indian economy on long terms.
It is evidently clear that the journey of Indian economy for last couple of years remained under distress owing to unfavorable conditions caused due to policy transformation moved to bring in structural changes. The economy has suffered recent health catastrophe caused across the globe by pandemic besides slowdown of 2019. It is also a fact that resilient economies characteristically withstand such turbulences and rebound back to recovery when served with diligent revival plans. As regards economic blow of COVID-19, there is no clarity as to how long it will last and it therefore needs to be handled more professionally for saving both lives and livelihood. The recent World Bank Global Economic Outlook predicts that most of the countries in the world will be under recession in the coming months. It is expected that Union Government will strike right balance with federal governments to achieve an inclusive growth in the given situation and bring back the economy on growth trajectory. The economists, experts and policy makers may have different viewpoints to the situation. However, the underlying objective remains the revival of the economy. We have to work out right mix of idealistic and crude actions in this regard.
We may have to work towards government driven expenditure to increase consumption led demand. The investment in building resilient and futuristic infrastructure could address multiple problems such as large scale unemployment, liquidity crisis, consumption led demand and environmental challenges. Fiscal deficit is another area that needs to be addressed by drawing right balance between revenue and expenditure. A more prudent approach in tax collection system would help Government to arrest loss of revenue. Similarly, a critical look at Government expenditure of revenue category may bring positive results. Core sectors prioritization of Agriculture, healthcare, education, IT etc. may be able to trigger growth. Rural development also needs to be given due care as large number of laborers migrated back to their homes and require employment in local Government sponsored schemes. Rural infrastructure therefore needs to be reinforced adequately to meet new challenges.
In the present scenario when the uncertainty of pandemic driven lockdowns has hit already stressed Indian economy, it requires multipronged approach for reviving robust agricultural growth, industrial production including production of consumer durables, fully ramped up health sector and other core economic activities besides drawing a prudent lay out for revenue and expenditure to curb rising fiscal deficit in the larger economic interest of the nation. Jai Hind, Jai Bharat.
(The author is Wg Cdr (Retd)