While the government did announce a series of measures to ease some of the economic pain inflicted by the pandemic, India’s actual fiscal support was grossly low. According to some reports, India’s actual fiscal stimulus as a percentage of the GDP was only 1-2 per cent, considered among the lowest in the world. The stimulus was even lower than some of its less well-to-do emerging market peers.
Fast forward nine months, and there now seems to be an argument that the country has done well to rebound from the shock of the Covid-19 pandemic simply by easing restrictions and letting individuals tackle the pandemic in the way they see fit.
As the country awaits the third Union Budget by finance minister Nirmala Sitharaman on February 1, there have been calls to the government to not give in to the temptation of spending its way out of the crisis.
But, fiscal prudence today for the sake of it may leave the country in a worse shape in the medium term than is perceptible currently. That was the sense among the panellists at the
ETMarkets Global Summit 2021. The virtual event, which kicked off on Wednesday on www.etmarkets.com, runs through January 22.
“Lack of fiscal spending has not hurt immediate economic recovery but it could have implications for medium-term growth,” said Pranjul Bhandari, chief India economist with HSBC at a panel discussion during the Summit.
Bhandari is concerned that the pandemic’s scar on the society is visible in the form of rise in inequality and that the growth bump being enjoyed by the economy may well fade away soon once the investors realise that beyond the top income earners, there are no levers for further demand boost in the economy.
India’s savings jumped spectacularly during the lockdown months as those in the highest level of the income pyramid had no avenues for consumption. However, the impact of the pandemic on the bottom rung of the income pyramid remains very acute, as is evident from the high unemployment level that stood at over 9 per cent in December.
“Growth-oriented measures should be primary (in the Budget) and fiscal considerations secondary,” argued Sangita Reddy, joint managing director of Apollo Hospitals and president of industry body FICCI, who was also part of the panel.
Reddy said that FICCI has recommended that the government look at a job scheme for the urban poor, which could act as a social security net against the vagaries of the pandemic. She also said that low income housing, enhanced spend on infrastructure and on the rural economy could act as measures to counter the massive unemployment in low-income households.
Rathin Roy, managing director at Overseas Development Institute and senior visiting fellow at the Centre for Policy Research, however, argued that the government has lost the ability and control to balance its act when it comes to the Budget.
Roy is of the view that the government did not indulge itself in large fiscal stimulus because they “simply could not do it”. “They simply did not have the state capacity to reach out to numbers of people…what they did is engineer a profit-led recovery to flush the banking system with money, create liquidity, condone defaults,” Roy said.
That said, panellists were in agreement that the need of the hour is for the government to adopt a targeted fiscal spending approach instead of fiscal profligacy. “The bottom [of the income pyramid] is where you need income support, which is where your employment support schemes are necessary,” said Sonal Verma, managing director and chief economist at Nomura Holdings.
Verma said that the government does not need to provide stimulus for the middle and high-earning strata of the society. What it needs to do is take care of those that need its support most like the migrant workers, rural landless labourers and small business owners in the unorganized sector.
“People in the middle and bottom of the (income) pyramid have not been as safeguarded as those at the top, and I think this important point should be kept in mind during the Budget-making exercise,” Bhandari said.