An­nounce an­other stim­u­lus

De­mand, not liq­uid­ity, is the key eco­nomic chal­lenge

Hindustan Times (Chandigarh) - - Comment -

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.

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