INDIA’S ECONOMY WILL SHRINK THIS YEAR FOR THE FIRST TIME SINCE 1979

WHAT HAPPENED IN 1979?

In the Summer of 1979, the fiscal policy was pretty loose. India suffered the worst drought since Independence and the global oil shock(which was caused by the Islamic Revolution in Iran). The Seventh Finance Commission(1977) recommended a large increase- in the share of the states (of the central government’s tax revenues), but without any reduction in the center’s responsibilities.

All these factors came in the backdrop of fiscal irresponsibility. While agricultural and foodgrain fell by a 6th and terms of trade(the ratio of export to import prices) deteriorated by a 3rd(due to oil price spike), the current account deficit also deteriorated.

Disturbances in Assam curtailed the domestic oil supply as well. Inflation also started to react and the wholesale price index also went up.

In 1979, the economy was growing but at a much slower pace than usual.

ECONOMIC CONDITION IN 2020

The warning of zero growth came a week after the government committed $266 billion to support the economy, which includes measures to enhance liquidity for businesses and an earlier $23 billion stimulus package to help poor people.

There were already some cyclical challenges even before the COVID-19 pandemic. There has been freezing in the wholesale market during most of 2019, which resulted in declining credit growth among nonbanking financial companies, particularly the informal sector. The lockdown has further amplified the challenges.

The World Bank says that India’s Economy is to shrink by 3.2% in 2020-2021, which is the worst since 1979. The Bank’s Global Economic Prospects report states that the last fiscal year’s gross domestic product(GDP) was 4.2% which is forecasted to fall by 3.2%.

It is also projected that there will be a 3.6% drop in the per capita income which will tip millions of people into extreme poverty. The World Bank Vice President said that the outlook of the economy is deeply sobering, which is going to leave long-lasting scars and pose major global challenges.

Moody’s Investors Service cuts India’s economic growth in 2020 to 2.5% from 5. 3%, as a result of the rising economic price of the coronavirus pandemic. This compares to a 5 percent growth in 2019.

International Monetary Fund(IMF) predicts India’s economy to contract through 4.5% in FY21.

The Governor of RBI (Reserve Bank of India) Shaktikanta Das said that this year the economy won’t grow at all. He talked about new measures to bear a hand to the ailing economy. One of such measures is slashing the lending rate of RBI from 4.4% to 4%. To the small and medium-sized businesses, even a three-month debt moratorium is offered by 90 days.

 

RECOVERY OF THE ECONOMY

The recovery of the economy is expected to be gradual because a certain amount of social distancing will continue over the medium term. So it will be uneven across different sectors. Businesses that depend on the gathering of people, such as retail, hospitality, tourism, cinemas, exhibitions, and construction sites are predicted to see ongoing restrictions and weaker activity.

On the other hand, the sectors which cater to the need for social distancing like packaged foods, home automation, and improvement plays(white goods, consumer electronics, decorative paints), personal hygiene products, telecom is predicted to recover faster.

The Indian Government can revitalize economic growth through “3Rs” and address the cyclical growth challenges. The 3Rs are-Recycle(Through the privatization of state-owned enterprise assets, funding government spending), Rebuild (The aggregation of savings by providing tax cuts to the households and the private sector), Reinvest (Providing incentives for manufacturing firms to reinvest such savings to substitute imports and increase the country’s global market share of exports). An element of the 3Rs that is Recycle, Rebuild, and Reinvent cannot be implemented right now due to the pandemic, but the other factors can be worked upon.

To bring the economy to a normal condition some fiscal measures needs to be taken which focuses on the long term-

1.      To incentivize capital formation and attract foreign investment, a reduction of corporate tax rates on new investments are required.

2.      To encourage private sector investment, the removal of dividend distribution taxis required.

3.      A simplified personal income regime by reducing rates is required.

4.      For the direct transfer of money to the farmers in a targeted way, the expansion of the PM-KISHAN scheme is required.

5.      To improve the productivity of the economy, higher spending is to be made on rural roads, transportation, irrigation, warehousing.

Some monetary measures are also to be taken like

  •  Operation Twist(A term used in the US, which means the purchase of long-term bonds and sale of short-term government bonds)
 
  •  Long-term repo operation (long-term repurchase of one-year and three-year bonds)
  • Targeted Credit Easing(lowering reserve requirements for auto loans, delaying classification of commercial real estate loans by one year where the projects were deferred due to reasons beyond control, lending to micro, small, and medium enterprises).

 

CONCLUSION 

The Government understands that boosting the economy is as important as fighting with the pandemic, so more steps need to be taken to bring the economy to a better position.

 

 

                       

 

 

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