The GDP for Q4 Fiscal Year (FY) 21 has just been published by the government and registers a growth of 1.60% year-over-year (YoY) while the GDP for the entire year has been reported to have contracted by 7.3%. These numbers may be better than what many might have expected but they still do not portend well for FY 22. The CEA (Chief Economic Advisor of India), the RBI (Reserve Bank of India) and many others have opined that the impact of the second wave of COVID-19 on the economy is not likely to be as severe as the first but it is difficult to share this optimum for the following reasons.
The economy was tottering even before the pandemic struck the country and things have only become worse since then. Millions of people have had to spend huge sums of money on medicines and hospitalization and many would even have been driven into deep debt. Countless numbers have also lost their jobs and livelihood as a result of the pandemic adding to the already high rate of unemployment. Poverty has risen to alarming levels eroding the gains made over the years.
the economies of the US, UK and EU countries are looking up, has largely come out of the pandemic and India must lose no time to grab every available opportunity to expand its exports to these countries.
Even those fortunate enough not to have been adversely impacted by the virus would surely be averse to spending on non-essential items when the threat of infection still looms large. They might instead be expected to save their surplus money to meet any future health-related contingencies. They might be inclined to spend only when the threat of the virus has completely disappeared and confidence has been restored in their minds.
Without money in the hands of the people and a willingness on their part to spend, any expectation of domestic demand improving would be absurd. So what is the way out of this morass? Two approaches come to mind and merit serious consideration.
Massive job creation to improve domestic demand
This calls for a great deal of investment to create new avenues for employment. The government is already running up a huge fiscal deficit and its ability to invest and create jobs in a big way is therefore quite limited. It might of course be expected to plough more funds through the MNREGA route but that would be only nominal. The domestic private sector would also be unwilling to make any new investments given the already existing excess capacity and the bleak prospects of a demand revival.
Focus on overseas markets and enabling a big boost to exports
Fortunately, the economies of the US, UK and EU countries are looking up, has largely come out of the pandemic and India must lose no time to grab every available opportunity to expand its exports to these countries. It is not enough to focus on our traditional items of export as there is a limit to their potential. It is essential to add new industrial products, more sophisticated and value-added and, become an integral part of the global supply chains. This calls for large capital investments, infusion of technologies and above all, the creation of trustworthy brands all of which cannot be marshalled from within the country. Investments by multinational corporations are imperative and we should roll out the red carpet to attract such investments. Apart from attractive fiscal incentives which hitherto have been patchy and ad hoc and considered inadequate, numerous other steps need to be taken in the areas of land allocation, simplification of labour laws, stable and clear cut taxation policies, swift clearances and approvals of proposals and everything else necessary to bring in the investors without fail. Just as China had done in the past, the establishment of special economic zones with a separate suite of rules and regulations have to be organised on a war footing. Given the right approach and speed of action, it should not be difficult to wean away multinationals from China especially since western nations are disenchanted with that country. When Vietnam, Thailand and even Bangladesh could attract investments, the only reason why India could not do so is because of unimaginative policies and bureaucratic bottlenecks. The task of attracting foreign investments cannot be left to the individual state governments and the centre must take it upon itself to do the needful.
Not only will large scale investments by overseas corporations create plenty of jobs, but they would also enable India to upgrade itself technologically, result in the training of its manpower and give an impetus to domestic demand as well. We must think big and act boldly and swiftly.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
- How to set the Indian economy on a growth path - June 5, 2021