Welfarism and growth

We have to get past the obsessive compulsion to look at monthly outcomes and instead adopt a medium-to-long-term approach for a sustainable recovery

The Indian economy has been stress-tested many times before but never been dented as savagely as this time around. But 2020 will be remembered as the year that eroded a decade’s worth of progress, the annus horribilis that bought humanity to its knees. Governments and businesses across the world are undergoing rapid recalibrations in order to adjust to the world of extreme volatility, uncertainty, complexity and ambiguity (VUCA). So, when the Chief Economist of the International Monetary Fund (IMF) states that “the world economy is not coming back to 2019 levels until 2022”, it is a comforting statement of fact that economic contraction is a universal phenomenon and not a stand-alone, India-centric affliction.

So, how is the Government catalysing towards a sustainable growth momentum? The task has not been easy for a country with limited financial resources to secure lives and livelihoods of 130 crore people, who account for 18 per cent of the world’s population. Given the constraints, the Narendra Modi-led Government has pursued a path of re-booting and rebuilding the economy by wresting four pillars parallelly. First, by addressing interim and short-term solutions for sustaining livelihoods. Second, by identifying and spending on post-Covid sectors of growth that will lead to sustainable and a long-term recovery. Third, by using its mandate to push ahead with powerful reform agenda, passing in quick succession long-pending reforms in labour, agriculture and education. India is poised for a stronger and more robust comeback as compared to partial or cyclical rebounds. Fourth, in order to maintain a steady growth momentum, the Government has pursued balancing social sector spending with infrastructure spending. The Centre recognises the importance of infrastructure as the foremost engine of growth and the need to scale up outlays to at least eight per cent of Gross Domestic Product (GDP) on “next-generation infrastructure,” for which an allocation of Rs 111 trillion investment has been set aside from 2020 to 25.

Can the Government do more by way of welfarist measures, given the anticipated shortfalls in revenue? The World Bank, usually the paragon of caution, has this time around advised emerging nations like India to set aside fiscal prudence and take on further debt, as “you first worry about fighting the war, then you figure out how to pay for it.”

Interim solutions lie in first addressing livelihood issues by further extending the timelines of direct income support for the rural poor, as also offering urban migrants a similar package. The Centre has spent around two per cent of GDP on welfarist schemes like direct cash transfers for income support, free grains for the rural poor, increased spendings on Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and so on. As the crisis is far from over and the duration of the pandemic is uncertain, it is doubtful the Government will prematurely withdraw welfarist spending.

By lowering interest rates, providing credit guarantees for MSMEs, allowing for loan moratoriums and one-time restructuring of loans, the Government has deployed a sizeable fiscal package of around seven per cent of GDP towards increasing liquidity. This is much required to address the supply side needs of the industry, though funding has not adequately percolated down to SMEs, who are most severely impacted by the downturn.

While globally, Central Banks have continued with massive doses of Quantitative Easing (QE), there is room for more in emerging markets like India as the effect of rate cuts and liquidity keeps waning due to the weak transmission. However, the policy of easing credit flows is not insulated from the downside risks of defaults that could impact the health of the already fragile banking sector. Because it is a given that the impact on the financial sector isn’t usually immediately visible, so the true impact of defaults on loans will reflect only in the following quarters.

The phenomenon of “revenge” or “rebound” spending during the festival months is at best a temporary surge. As we enter the festive season, there is already an average uptick by 34 per cent to 40 per cent in sector-specific surges in the major propellers of growth like retail, consumer durables, automobiles and residential housing. However, socio-economic variables have contributed to worsening VUCA levels in the services sector, which contributes 54 per cent to the GDP but has seen irrecoverable demand-destruction.

Travel, tourism, shopping, hospitality, aviation, entertainment, leisure and fashion come under the discretionary-spend service sector, which is expected to see an improvement during the festive months. Viewed through the lens of behavioural science, the phenomenon of “revenge buying, or spending on indulgences” happens after a prolonged period of suppression on lifestyle pleasures that creates the much needed “feel-good factor.” Levels of discretionary spending are a vital marker of economic health, as people only spend on lifestyle expenses once they have disposable funds left after paying for taxes, housing, savings and other essential needs.

To gauge the downward or upward trends in these sectors, predictive insights can be gained from the data of the Google Community Mobility Report that uses anonymised data provided by Google Maps. The global Google Mobility Index trends show that travel and mobility levels had fallen to 44.7 per cent in April and risen to 82 per cent by mid-September. Here again, mobility and commuting will vary with the spread or decrease in regional Covid-loads.

The aviation and hospitality industries have been among the 26 most stressed sectors and recovery is not expected before 18 to 24 months. The tourism industry contributes nine per cent to the GDP, generates substantial revenues and accounted for 87 million jobs in 2019.

The festival season is expected to give a big boost to these closely aligned sectors and will hopefully fuel the wheels of the economy till the end of 2020. Optimism thereafter rests on the advent of the vaccine by early 2021. However, with the onset of winter and the negligence of maintaining distancing protocols at festive gatherings, there is a risk of further waves of viral outbreaks. This in turn will deepen the negative impact on future earnings and impact consumer spending in the following quarter of 2020 to 21.

Ultimately, the volume of consumer spending is not being dictated by need-based buying, but by what I term as the “Index of Fear-Intensity.” The quantum of “Fear-Intensity” in consumers wanes and rises in response to the local Covid-load, intermittent lockdowns and the visibility of each individual’s anticipated earnings over the next six months, which are now dictating behavioural patterns of consumers.

Which sectors can ride the economy towards sustainable recovery? There is empirical evidence that increased spending in infrastructure during downturns has never failed to have trickle-down effects in rebooting the economy and creating millions of jobs. As most emerging nations are constrained for resources, the Indian Government would be looking to tap into concessionary finance facilities being extended by international development finance institutions. The World Bank, Asian Development Bank and IMF are fast-tracking generous assistance to member countries facing a Covid-crunch, with global interest rates being at historic lows.

Assessing sectoral bounce backs in recovery for the July to September quarter, it has been largely driven by agriculture, while IT, healthcare, fintech, educational technology, telecom and e-commerce sectors will remain the prime engines of post-Covid growth, as they come under the category of the new “Touchless and Homebody Economy.”

Stock markets, long seen as a proxy for the real economy, are now being driven by ultra-lax monetary policies in the developed world. But stock market buoyancy in no way mirrors the actual economic pain at ground levels, even as the Sensex consolidates around the 40,000 mark.

However, unlike measuring the stock market performance on a quarterly basis, corporates and the Government will have to get past the obsessive compulsion to look at monthly outcomes, and instead adopt a medium-to-long-term approach for a sustainable recovery, while remaining resilient enough to calibrate policies to the VUCA factors.

(The writer is author, columnist and Chairperson of the National Committee for Financial Inclusion at the Niti Aayog)

Source: The PIoneer