Ensuring Growth through Reforms

The world is juggling between economic slowdown and containing the spread of COVID-19, so as India. The previous 21 days lockdown has been extended for 18 more days with a hint of relaxation after April 20th. Does this lockdown help India in containing the virus spread but what would be the aftermath? What would be the situation of the Indian economy? I came across a couple of editorials discussing that the pandemic situation which can be used as a chance to reform the country’s economic policies. And also the authors of those editorials analysed that India would make reformative measures to the economy only when the country faces some crisis (like 1991 economic reform). So this is the time for our policymakers to reform our economic policy and ensure our country overcome the economic slowdown.

Inflation and Growth

The NDA government is very keen on controlling the inflation within the 4% target by 2021. But as far as the growth is concerned in a developing country inflation control should be liberal. Inflation with high growth is positive and could be controlled easily without people getting affected adversely. The growth of the country started declining from 5% in (Quarter 1) Q1 of FY20 to 4.5% in Q2 of FY20. So, the government reduced the corporate tax rate in its Budget for the year 2019-2020. Also, the Monetary Policy Committee of the RBI started to cut the repo rate to increase money flow in the economy to induce growth deviating from the inflation target which is an appreciable move. Also, in the Budget 2020 Finance minister announced corporate tax rate cut and low tax rates for newly established companies. But later in December despite the economic slowdown, the RBI governor refused to reduce the repo rate from 5.15% citing the high inflation. International Monetary Fund (IMF) has predicted the growth of India to be 1.9% in 2020. This is a good number compared to the SBI’s report, it says real GDP may plunge to 1.1% in FY21 and growth for the year 2019-2020 has been estimated to come down to 4.1% from the 5% projected earlier.

With the note of these statistics, I strongly recommend that the government should not fear inflation when the economy is in slow down rather should find a way to boost the economy. Does RBI governor’s decision of not cutting the repo rate serve its purpose? No, the retail inflation hiked very much in Jan 2020 to 7.59% and the food price inflation stood at 13.63% with no significant improvement in the growth. Index of Industrial Production (IIP) contracted to 0.3% in Dec’19 from 1.8% in Nov’19. This situation of high inflation and low growth rate leads to Stagflation. People don’t have money in their hands but the prices of commodities will be high and the poor will be heavily affected by the situation. By Feb 2020 the retail inflation eased to 6.5% and in Mar 2020 it eased to 5.91% as per the CPI released by NSO. Retail inflation dip is good but the nation-wide lockdown till May 3 causes cash crunch in people’s hands. Since the economic activity is standstill due to the virus outbreak, RBI governor on April 17 reduced the Reverse Repo Rate (RRR) from 4% to 3.75%. Already RBI has announced Repo Rate (RR) cut to 4.4% on March 27.

India’s High Growth Years

During the global economic slowdown in 2008, India’s GDP was growing at 6%. How the then government could have handled the recession? The then UPA government did not worry about the inflation at the time of recession. That is the reason for the growth of the country. The only known solution to revive the slowdown of an economy is to increase the liquidity in the economy. The inflation also helps in boosting exports. The inflation reduces the rupee value against the dollar so the products would become cheap in the market thereby exports get increased. Increased exports generate more employment opportunities through the exporting companies who would hire small companies (unorganized sector) on contract to help manufacture their goods due to high demand. The unorganized sectors employ unskilled labours and to agricultural labourers who were left unemployed. Their wages were paid daily or weekly and these unorganized companies find their capital from Non-Banking Financial Companies (NBFC).

Is inflation good to a nation? Can inflation be encouraged in a country for its’ economic growth? No, it should be a check. The government should be able to increase the cash flow in case of economic slowdown and to control when needed. Since the NDA government announced demonetisation in Nov 2016 it created a cash crunch in those NBFCs and these small companies couldn’t pay their labourers. When the situation got better the government reformed its tax policy by introducing Goods and Services Tax (GST) in July 2017. The implementation of GST affected the sector since the tax rates were shuffled several times and the procedure for the compliance was new. So, the unorganized sector which gives employment for 90% of India’s labour force got affected. Heavily hit were Tirupur and Surat-based textile companies. The exporting companies are huge enough to generate capital, get loans from banks and pay wages and to file GST. But the situation of small companies which work for the exporters got affected adversely since they tend to find capital or loans from small non-banking financial companies which faced a cash crunch. 

Also, NDA led government’s Digital India policy and cashless economy policy sucked all the cash in the economy whereby filled the banks. This move is very good in a country where organised sectors are dominating the economic growth but in developing countries like India, these types of economic measures are nugatory which created cash crunch to unorganized and daily waged labourers. The series of economic policies of the NDA government obstructed the growth of the nation despite the huge potential of the country. 

The problem is with the demand side; when people have more money in their hands the purchasing power of the people increase thereby demand increases and growth is inevitable. The series of economic policies to increase the foreign investments and establishment of new companies, like Make in India, liberalising foreign investments etc. ensured the development of the supply side. The demand side should be addressed as soon as possible to revive the economy. Gov’t should monetise the people’s hands to increase the demand in the market. Also, Gov’t should ensure good markets for the export of our goods. Increase in exports only can boost economic growth and generate employment opportunities. 

On April 17th of this year, RBI governor Sakthi Kandhadas has said, “Will do whatever it takes to tackle the virus”. RBI has announced several steps on April 17 to ease financial stress and to maintain adequate liquidity in the system as a part of which RBI has provided ₹50,000 crores to financial institutions like NABARD, SIDBI and National Housing Bank for refinancing. This is what economists are insisting, the government should find ways to boost the economy rather being frightened over inflation. However increasing the liquidity in the economy alone will not help the poor, govt should directly monetise the poor to overcome the economic slowdown due to the COVID 19. I’m glad about the RRR cut and hoping the government and RBI will act effectively to revive the economy. Thus India needs economic policy reforms, not like 1991 reform but a slight liberal approach to control inflation, digital banking, unorganized sector etc.