COUNTER SLOWDOWN WITH BIGGER RELIEF PACKAGE

That the economy will contract this year is not in doubt but there is no unanimity on the extent of contraction. The official estimate is around five per cent while the ratings agencies reckon it could be closer to seven per cent. Some economists perceive it will be as high as 15 per cent. Whatever the actual deceleration in the Covid-19-hit economy, the Government is expected to take proactive steps to stem the decline. The RBI’s annual report, released on Tuesday, noted that it would take “quite some time to mend and regain” the pre-Covid momentum. It said that for the first time ever, the GDP will shrink this year. Given the agreement on the sharp drop in GDP, the policy prescriptions meant to boost growth are still not in place. Some of the fire-fighting measures already implemented are bound to be inadequate to boost growth. The government is too cautious in pumppriming the economy. While the sharp slowdown is due to a general lack of demand, private consumption is unlikely to pick up unless people have surplus funds. Post-Covid, consumers are careful in spending on non-essential items. Saving for a rainy day in these difficult times has sharply curbed discretionary spending. Then again, large sectors of the economy remain under lockdown. Though much higher than in a normal year, government spending by itself may not be enough to compensate for the loss of incomes in large swathes of the private sector. Regardless of the official claim, the actual size of the Covid-relief package is much smaller. In spite of a niggardly relief, fiscal deficit is set to rise sharply. Cheap oil has helped the Government recoup some of the additional expenditure but the higher fisc at a time when inflation is ruling at about seven per cent limits its space for much expansion. Printing money to put in the hands of consumers in order to boost consumption is an option recommended by those impatient with the gover nment’s cautious approach on the fiscal deficit. This approach is fine during normal times, but these are hardly normal times, argue some economists. In the year of the pandemic, keeping the fisc under control should not be a priority. Instead, a generous relief package alone may help keep the GDP contraction at manageable levels. Liberal financial assistance for companies hit by the disruption will mitigate the pain to some extent. We may not be in a position to follow the example of the US, the UK and Japan, which have lifted the lid on cash for all economic actors, but the sorry state of a vast swathe of the private industry and trade calls for a generous infusion of cash. Meanwhile, in the bleak scenario, agriculture alone is a ray of hope, but it too cannot provide full employment to the rural poor. Migration to urban centres is already underway. Besides, agriculture accounts for about 14 per cent of the GDP. Without revving up the urban economic engine, the GDP contraction is bound to be much higher than officially estimated. Any delay in a large infusion of cash in the hands of the people to pep up demand may further hinder revival of demand.