Is the worst yet to come for India’s economy? Even as opinions remain divided on the issue, a recent ET Online poll has thrown up some interesting observations.
After the deep GDP contraction in April-June, people are deeply split on what lies ahead. In the survey, one half expects a long and tough road to recovery, while the other sees clearer skies ahead.
Those who see a slow and painful revival blame the lack of Centre-state cohesion for it. Those who harbour expectations of a relatively speedier revival pin their hopes on a boost to middle-class sentiments.
In essence, the findings of the survey underline four major aspects: a) lockdowns damage economies the most; b) boosting middle-class sentiments is India’s best bet; c) lack of Centre-state cohesion can make the road to recovery difficult; and d) the need for a Stimulus 2.0.
“India imposed one of the most stringent lockdowns worldwide in 2020 and domestic demand fell massively. Limited fiscal support, fragilities in the financial system, and a continued rise in virus cases hamper a rapid normalization in activity,” Fitch Ratings said in the Global Economic Outlook–September 2020 Recovery Underway report released last week.
Fitch added that the continued spread of the virus and the imposition of sporadic shutdowns across the country have depressed sentiment and disrupted economic activity.
A considerable percentage of survey participants, however, felt that these lockdowns were necessary, and that the government’s hands were tied in this matter. Be that as it may, with the economic costs of lockdown now becoming increasingly unbearable, it looks like it’ll only be a matter of time before Modi announces an unconditional full-reopening, some analysts say.
If such a full unlocking happens as predicted, that would leave us with three other actionable areas — stimulus, rising Centre-state acrimony and a middle-class sentiment boost.
Amid rising desperation in some quarters regarding the delay in Stimulus 2.0, a debate has started around whether the govt should go all out or keep the powder dry for some more time.
On this issue, most of the survey respondents didn’t really think that the govt was wasting time on the stimulus, saying that all that can be done is already being done.
This view, however, doesn’t gel with that of those such as former RBI governor Raghuram Rajan, who has found faults with the govt for not expediting the second round of stimulus.
Rajan says that the first round was not up to par, and that holding back resources for a future stimulus would be a “self-defeating” strategy.
While a majority of frontline economists have expressed views similar to Rajan’s, there are some who believe the govt is right in biding its time before unleashing the next round.
A fair share of the spoils
The second area covers the evolving dispute between the Centre and the states over GST compensation share. The Centre is adamant that the borrowing be done by states, a proposal that most states have found unpalatable.
States ruled by the Opposition are firm in their stance, and would rather have the Centre borrow to compensate for their revenue loss.
“They have taken the right of taxation away from states, they collect the taxes and then tell states that they must borrow, it makes no sense,” Chhattisgarh commercial tax minister TS Singh Deo said. Deo’s views are being echoed by many of his fellow state finance ministers.
If a solution to the GST impasse is not found quickly, it could hinder recovery in a serious manner. But there seems to be a way out.
The government’s best bet would be to focus efforts on raising revenues so that it can pay the states their GST dues, which in turn can be used by the states to undertake relief measures tailored to each one’s needs, said Reetika Khera, Professor of Economics, IIT-D.
To raise revenues the Centre could impose a wealth tax on those whose worth is more than Rs 1,000 crore, widening the base and rates of property taxes, reducing non-merit subsidies and giving fewer tax breaks, she suggested.
Almost a half of the survey participants said they wanted the government to give the middle class a sentiment boost to make sure that a recovery is fast-tracked.
There were not too many backers for direct cash transfer to the economically weaker sections, despite the fact that such a measure could spark a consumption turnaround in rural India before eventually permeating to all corners of the country.
The middle class, long the flagbearer of India’s consumption-driven growth story, has always got the short end of the stick when it comes to policy assistance. Many economists believe that a sentiment boost to this category — preferably by way of a tax breather — can work wonders for the economy.
Some like economy commentator Swaminathan Aiyar, however, see more merit in cash dole to the needy than in a middle-class boost. According to him, Modi govt should greatly raise cash handouts to the weaker sections by way of JanDhan a/cs or MGNREGA. “The poor are worst-hit and most likely to spend additional cash, boosting the economy. Richer folk are more cautious and less likely to spend,” he says.
Who really is middle class?
The concept of the middle class in India is somewhat convoluted. In terms of class structure, these would be people that fall in the middle of the working and upper classes.
By most definitions, those who earn more than $10 a day constitute the Indian middle class. A Pew Research Center study had shown in 2015 that according to global standards of middle income — per capita income between $10 to $20 a day — up to 95 per cent of India still qualifies as poor or low-income.
“In India there is a serious public misconception regarding who constitutes the middle class: often people who are more likely in the top 10 per cent (for example, people with home loans) think of themselves as middle class,” said Khera.
“Among such people, there was a brief moment of solidarity with workers and other poor people hit by the lockdown when they were being covered by the media,” said Khera, adding that those hardships have not ended.
“No doubt they (upper class) are in a difficult situation today, but there is a much larger section of the population — the bottom 50-60 per cent — for whom the hardships range from sleeping hungry, to making distress sales, to even taking their own lives,” she explains.