Announce another stimulus
Demand, not liquidity, is the key economic challenge
On August 22, this newspaper published an exclusive report based on a presentation made by the ministry of micro, small and medium enterprises (MSMES). The presentation said that as on August 1, threefourths of India’s MSMES were working at less than half their potential capacity. It also said that more than 90% had opened up, showing that the unlock process, at least in principle, has been almost completed. These statistics underline the central economic challenge facing the economy. Just allowing enterprises to open is not going to restore the status quo ante, which existed before the pandemic forced a nationwide lockdown. To be sure, the economy was not in great shape even before the pandemic. GDP growth rate fell from 8.3% in 2016-17 to 7%, 6.1% and 4.2% in 2017-18, 2018-19 and 2019-20. Most estimates expect India’s GDP to contract by 5% or more this year.
MSMES account for 30% of GDP. They employ almost onefourth of India’s workers. That an overwhelming share of MSMES is not using even their existing capacity means that they are facing a crisis of demand. If this situation is allowed to persist, it will generate a vicious cycle. Firms will lay off workers. Laid-off workers will lose their salaries, which will further squeeze demand. Orders for new investments and raw materials will be postponed, or worse, cancelled. This will lead to yet another round of job losses and demand depression. These developments will have an adverse impact on the financial sector as well. As revenues start falling short of past expectations, loan defaults will increase, which will add to the existing mountain of bad debt. All these developments have implications for India’s economic recovery, both in the short-and-medium term.
Breaking this vicious cycle requires urgent policy intervention. The government was wise to focus on liquidity challenges in its initial response to Covid-19. But it needs to shift gears. Demand, not liquidity, is the main challenge facing the economy today. At a time when consumer and business sentiment is down, the only way to boost demand is a fiscal stimulus. While there is some merit in the argument that it should be timed appropriately, at least the road map should be laid out as soon as possible. Any further delay on this front will only make matters worse.