“A faster economic recovery will also ensure fiscal health”

Prof Jeevant Rampal, IIM Ahmedabad, supports the argument that after safety has been ensured to the extent possible by improving health facilities rapidly, India can bounce back economically using expansionary fiscal measures financed by higher fiscal deficits.

IBT: Post-lockdown, India is seeing some positive trajectory in numbers pertaining to unemployment rate, power demand, kharif crop and also exports. How do you view the trajectory of the recovery in the coming months, and what are the key macro concerns?

Prof Jeevant Rampal: Both rural and urban unemployment rates are rapidly getting back to pre-lockdown level. This is very encouraging. Overall, India’s unemployment rate has reduced from the 25% figure in May, with latest figures of around 15% (CMIE). Thus, the short term recovery is very positive. The labour participation rates are also at around 90% of pre-lockdown levels, which is a very encouraging recovery on the employment front.

Exports had a devastating month in April, down to about US$ 10 billion (Trading economics). While the May numbers were better (US$ 19.05 billion), we may have to be realistic in our expectations. Since the global economy is expected to slow down significantly, and especially since the leading importers of Indian products like US, UK and China (for different reasons) are also slowing down, exports are unlikely to recover to pre-COVID levels very soon.

The good news is that the monsoon is expected to be normal. However migrant labour shortages may occur due to the reverse migration that just took place. Thus, farmers may need to move to direct seeding for rice, and make suitable adjustments in other crops. Government help in this transformation will be important. Another concern is that the uncertain demand situation may incentivize farmers to go towards ‘safe’ MSP crops like rice even more than usual. This may significantly increase food inflation. Power demand will depend on how the economy fares.

The speed and sustainability of macroeconomic recovery will depend upon the survival of industries and the economic strategy of the governments: state and central. While the revival of employment is encouraging, the survival of enterprises remains under threat, since demand has shrunk. For demand to recover, well planned government policies are needed.

IBT: How should India manage the life vs livelihood dilemma, considering the economic pain as well as the continuously rising cases, in your opinion?

Prof Jeevant Rampal: It is important to note that the problem is not just life vs livelihood, since loss of livelihood can cause loss of life, especially in India due to its horrific hunger problem. Thus the trade-off is life vs life. To specify India’s hunger problem, note that India was ranked 102/117 countries by the Global Hunger Index 2019, with hunger being a cause of death for an estimated 3 lakh children under the age of 5 (Indian Express), and an estimated 19 crore Indians facing malnutrition (Global Hunger Index 2019). Compared to that, COVID-19 related deaths are less than 15 thousand as of June 21.

Thus, loss of livelihood is no less dangerous for lives in India. But worse economic conditions shouldn’t be an excuse for any government to justify worse hunger conditions. Countries like Pakistan, Nepal, and Bangladesh have per capita GDPs at about half of India’s per capita GDP (in PPP terms), yet they perform better in dealing with hunger.

Thus, India can suffer through one more wave of economic pain and loss of livelihoods, and yet ensure better health for its citizens with appropriate government interventions countering hunger and COVID-19 simultaneously. After health safety has been ensured to the extent possible by improving health facilities rapidly, India can bounce back economically using expansionary fiscal measures financed by higher fiscal deficits.

IBT: A lot of migrant labour has moved to villages as a result of the lockdown. What policy initiatives do you propose to ensure that they get sustainable lives and livelihoods there? Also, what can government and industry do to encourage them to move back to cities?

Prof Jeevant Rampal: It is not necessarily optimal that migrants should return to the exact cities they used to work. For instance, if a migrant from rural UP finds a job in Meerut rather than Mumbai, then that may be better for everyone. We have an opportunity to develop smaller cities and towns in Bihar, UP and other states where migrants come from. These states now have abundant supply of labour. I think a step in the right direction has been taken in the Garib Kalyan Rojgar Abhiyaan (on 20th June) by announcing Rs 50,000 Cr for infrastructure projects in 116 districts in these states.

Increased fiscal spending on such schemes as well as MGNREGA can generate employment and demand in the short run. Furthermore, if this fiscal spending can be used to improve infrastructure within these states, then that can also provide a long-run boost to industries.

IBT: How is consumption demand expected to trend in the coming months, considering the general fear of moving to markets still persists? What policy initiatives can be taken to revive consumption for urban and rural areas?

Prof Jeevant Rampal: The lack of consumption demand is the serious underlying problem that must be dealt with in order to minimize the economic impact of the lockdown. Last year, India had seen that consumer spending had declined for the first time in over four decades in which such data was available. The consumption demand is likely to recover from May onward, but it is expected to be lower than pre-lockdown levels for at least one year because of earning uncertainty and consumers’ risk aversion.

Thus, there is expected to be a widespread demand shortfall for firms across sectors. Remedial policy initiatives can include further increase in MGNREGA expenditure and employment and more cash transfers; more disposable income needs to be given to the poorer sections. It is important to note that the poorer sections also have a higher marginal propensity to consume, thus it is the most effective way of boosting consumption demand. India’s cash transfers have been clearly insufficient thus far. Other than releasing due payments for MGNREGA and expediting payments for the existing PM KISAN scheme, GoI has promised a maximum of Rs 2,500 in cash payments in total between April-June to a person who qualifies for all cash transfers. This translates to US$ 137 in PPP terms – clearly insufficient when judged against US giving US$ 600 per month unemployment benefit for 3 months and US$ 1,200 per person one-time payment for poorer individuals.

While India’s MGNREGA allocation has been increased by Rs 40,000 crore, much more needs to be done to boost disposable income. It can be argued that the government is conserving resources for future bailouts and support, but by delaying assistance, it is also causing demand shortage and greater economic pain right now. Thus, the government should err on the side of overspending rather than underspending; a faster economic recovery is also a good way for government to increase revenues and recover fiscal health.

IBT: What is the expected impact on millions of MSMEs across the country of the lockdown in your view? To what extent will the Government’s Aatma Nirbhar package be helpful and what more can be done to help them tide over their problems?

Prof Jeevant Rampal: Micro enterprises comprise of more than 99% of the MSME enterprises, generating about 97% of its employment by employing more than 10.7 crore Indians pre-COVID (as per 2018-19 GOI MSME report). Sadly, this is an overlooked fact in media and policy. The Aatma Nirbhar package also does not target Micro enterprises; and it is likely that most of the relief measures will go to Small and Medium enterprises. Unless immediate targeted assistance is given to Micro enterprises in terms of helping them pay fixed costs and giving them cheap credit, large scale shutdown of micro enterprises may take place very soon, since surveys indicate that they are under severe distress.

This means that the recovery in employment can be short lived as the employers shut down due to the lack of credit and demand. In the medium to long term, giving credit to MSMEs without ensuring that demand for their products returns is going to be ineffective: the credit cannot be repaid and the enterprises shut anyway. Thus the measures to ensure the return of consumer demand are crucial for survival of micro enterprises as well as small and medium enterprises.

IBT: Banks are still reluctant to lend to businesses considering the enhanced risk perception. How can this quandary be resolved?

Prof Jeevant Rampal: Until banks see that the businesses have a robust demand, they will rightly prefer to not lend. Therefore, until the consumption demand problem is not remedied by increasing disposable income among the population, it seems unlikely that any other intervention will work. If banks are forced to lend, then that will lead to a problem of moral hazard and increase in defaults by businesses. This will further stretch banks’ already overstretched balance sheets. This can cause bank collapse, bank runs, and further reduce credit, thereby turning out to be completely counterproductive. Thus, the right approach may be to fix the demand problem first.

IBT: How do you view the impact on the services sector, given its dominance in share of GDP? What can be done to ease the pain for the services industry, particularly in the organised segment?

Prof Jeevant Rampal: The outlook for the service sector is poor, particularly for services associated with travel, tourism, entertainment, restaurants, and associated services. Healthcare and IT/Fintech services may emerge stronger, especially with a concerted push from policymakers in improving access to skills in these areas. Of course, the underlying problem of lack of demand has to be addressed. Assuming that is done, providing flexible options for workers to obtain new skills will be crucial. Being flexible to global and domestic demand will be key.

Jeevant Rampal is an Assistant Professor at Indian Institute of Management, Ahmedabad. He has done his PhD from the Ohio State University. His research interests include Behavioral and Experimental Economics, Game Theory, Mechanism Design, and Agricultural Economics.

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