Kickstarting economy without burdening government finances

India economic growth revival
The empty government coffers are faced with competing demand for funds and falling revenues, making a Keynesian solution extremely difficult.

A GDP growth rate in range of 0.8-1.9% spells disaster for a developing economy. The first priority of the Indian government should be redrawing its development approach to achieve high GDP growth and generation of quality employment for more than a million people who join the workforce every month. Due to the development path we followed, India with its 1.3 billion population has become a consumer country that attracts world business. But to ensure quality employment for its population, it is crucial to focus on the areas where we produce, consume and export.

Prime Minister Narendra Modi has announced a Rs 20 lakh crore package to help the economy suffering from the impact of the coronavirus outbreak and the impact of the shutdown to curb the spread of the pandemic. Higher government spending will definitely boost demand and help economic recovery. The empty government coffers are faced with competing demand for funds and falling revenues, making a Keynesian solution extremely difficult.

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To escape the after effects of Covid-19 on the economy, it is important to focus on agriculture, value addition to agriculture produce and improving rural infrastructure to create employment in villages. This will curb unplanned migration as people will find gainful employment near their villages. Agriculture provides income to 70% of population and that can be supplemented by dairy, fisheries, food processing, and better infrastructure work through convergence of MGNREGA with finance commission funds. This will provide employment to 15 crore households throughout the year.

Another sector is mining and related industries. India is blessed with coal, iron ore, bauxite, zinc, and manganese and has a robust industry producing steel, aluminum, alloys and power. Policies need to be adjusted to trigger growth in this sector. Mining provides employment to two crore people directly and indirectly. The sector contributes 3-4% of the country’s GDP.

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The third sector that needs focus is infrastructure. Poor infrastructure is a major hurdle for India’s growth. Infrastructure development will generate employment and push industrial growth, especially of MSMEs. Work on roads, bridges, ports, and irrigation facilities will trigger economic growth. Good infrastructure is an essential requirement for economic growth. This sector can provide employment to another 4-5 crore people. Gainful employment to 60 crore people will put money in the hands of people, triggering growth in manufacturing and services that will provide employment opportunities to the rest of the population. The fast-moving consumer goods (FMCG) cycle will also get triggered, ploughing back income into MSMEs.

The government will have to focus its efforts and scarce resources in infrastructure. The RBI has reduced reverse repo rate bringing enough liquidity to the banks. The banks must come forward to give working capital for infrastructure development. The fear of defaults has forced them to park Rs 8.4 lakh crore with RBI. If bankers do not lend now, the NPAs will force them to resort to haircuts. Thus, it is better to provide credit at this juncture so that their asset quality improves. Lending makes good business sense to bank and for the economy. If our banks are not ready to provide liquidity, the inflow of FDI and FPI will eventually dry up. Better liquidity in the economy will generate demand for FMCG and trigger manufacturing.

The question is how to kickstart the economy? The government coffers are empty, but reducing GST by half and offering tax holiday for one year will improve the economic situation by triggering production and consumption. The government earnings will improve through higher volumes. By going back to the drawing board, the central and state governments have to transform from regulator to facilitator. They need to remove every impediment to trigger manufacturing in the country by offering good infrastructure, affordable power and credit, and improving logistics to push exports. Make in India should be given a leg-up by removing all hurdles to doing business. GST cut for a year will improve liquidity for businesses and enable them to overcome the present crisis.

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The next big area is social protection in terms of direct benefits and food security. For six months, the government should allow people to draw foodgrains from PDS with or without ration cards. It will provide a big relief to poor and there will be a small percentage of misuse that can be ignored. The country has enough stocks. In these six months implement Samagra, the common household data base, throughout India. Shifting all welfare schemes to this common database will be a paradigm shift. This will improve the efficiency of direct transfer of benefits both in regular schemes and in distress situations. Having an account within 5 km radius of all habitats — in post offices, banks or cooperative banks — will make the system work well.

This threefold approach with no extra burden on treasury will trigger economic growth by improving demand, and generating employment opportunities.

(Dr Aruna Sharma is a Delhi-based development economist and a former civil servant. She retired as secretary, ministry of steel, government of India in 2018.) 

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