Needless\nto describe the gravity of menace the Indian economy is in right now, thanks no\nthanks to COVID 19! It wasn\u2019t quite a long ago when everyone was talking about\nhow to set the ball rolling for our economy in the middle of a steep slowdown,\nand today; here we are, transiting to the question of recession vis-\u00e0-vis\nslowdown. A few notable economists say it\u2019s even worse than the great\ndepression of 1930\u2019s let alone the 2008 global financial crisis. Dr. Rathin\nRoy, director at NIPFP even describes it as a \u2018war like economy\u2019.<\/p>\n\n\n\n
The\nmost worrying aspect for India till January was consumption not picking up and\nnow yet again we cannot see ourselves faring good as many salaried employees\nwill be laid off, some might have to accept a wage cut and some who were\nseeking a job will have to stare at their computer screen for a while. And then\nthere is a substantial fraction of workers working in the informal sector namely\nin agriculture, mining and construction; where the labourer\u2019s wages are tied to\nrequirement of labour services on the job. For eg. If a building\u2019s construction\nwork comes to a halt as has now because of the lockdown, labourers will not\nhave any work to do and hence make a living from. Now, basic economics suggests\nus that even when income levels are mechanically near zero, people do maintain\na subsistence level of consumption. This subsistence consumption expenditure\nrequires consumers to have savings from the past or what we call dissavings. In\nfact now it could even mean borrowing from a bank or a friend though with an\nobligation to pay the lender in future. Additionally, consumers have a desire\nto maintain a stable path of consumption over their life cycle so they save for\nretirement and times of adversities. This is what we call consumption\nsmoothening. <\/p>\n\n\n\n
Now,\nin a nation where nearly 80% of the labourforce is employed in the informal\nsector, it is hard to believe that government didn\u2019t take stock of these\nworkers\u2019 consumption smoothening patterns and if it really did, maybe it\u2019s time\nto call upon our central planner: the government! I intentionally use the term\n\u2018central planner\u2019 as I borrow the theory from renowned macroeconomist Frank\nRamsey\u2019s infinite horizon model of consumption and investment. In this very\nmodel, the central planner aka government knows with certainty, the utility\nfunctions of consumers aka public and keeping in mind the market rate of\ninterest and consumers\u2019 discount factor, an optimal consumption path for the\neconomy is being worked out. Now, in these uncertain times, this model teaches\nus that despite the fiscal constraint that poses the government right now, it\nis time to go all in. The centre must step in to take care of consumption\nsmoothening of the aforementioned people and people in the lowest income\nquintile by direct cash and food assistance to these people via local government\nbodies, provision of adequate healthcare services and shelter to live beneath.\nBy this, I mean the government must go \u2018unconditional\u2019 while making these\nbenefits reach the vulnerable as not many of these would have a jan dhan\naccount or even a BPL(Below Poverty Line) card. This will require co-ordination\nwith the local bodies in particular i.e. resident welfare associations and\nmunicipal corporations in urban areas, and local panchayats in the rural areas.\nThis shall also alleviate the need for these poor people to make trips to banks\nmore so not to make banks crowded amidst social distancing requirements. India\ndoes have a tremendous local level government structure and it must be put to\nwork as we fight a war to keep the arteries of Indian body working. <\/p>\n\n\n\n
Next\nwise question pops up of financing the fiscal deficit arising on account of\nthis huge expenditure, then as Dr. C. Rangarajan, former RBI governor recently\nsaid, monetization of deficit is inevitable. In my opinion, resultant future\ninflation may not be seen as a big worry right now if simultaneous supply chains\u2019\nsmooth functioning is ensured. Likewise, it\u2019s time that the limits of\ncontingency funds maintained by centre and the state government are revisited\nas they look too miniscule in the face of this gripping crisis. Lastly, I would\nsay that India has this wonderful opportunity to rework its priorities in terms\nof need to step up budget allocation in the sectors like education and healthcare,\nwork aggressively towards formalizing the economy as it poses several\nchallenges during crises and, understand the importance of good centre-state\nrelations as this war cannot be even half won without co-operative action.<\/p>\n","protected":false},"excerpt":{"rendered":"
Now, in a nation where nearly 80% of the labourforce is employed in the informal sector, it is hard to believe that government didn\u2019t take stock of these workers\u2019 consumption smoothening patterns and if it really did, maybe it\u2019s time to call upon our central planner: the government!<\/p>\n","protected":false},"author":37,"featured_media":10230,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","footnotes":""},"categories":[1],"tags":[285,292],"class_list":["post-113693","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-covid-19","tag-economic-impact-of-corona-virus"],"yoast_head":"\n