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2-paced, V-shaped recovery on; there is room for fiscal spending, says CEA

Speaking at the Idea Exchange organised by The Indian Express, Chief Economic Adviser Krishnamurthy Subramanian said enhanced fiscal space could be used to push demand by focusing primarily on infrastructure.

By: ENS Economic Bureau | New Delhi | November 8, 2020 1:05:05 am
Chief Economic Adviser Dr Krishnamurthy Subramanian attended the online Idea Exchange on Saturday.

STATING THAT THE Indian economy is seeing a two-paced, V-shaped recovery, Chief Economic Adviser Krishnamurthy Subramanian on Saturday said there is scope for fiscal spending in the remaining months of this financial year.

Speaking at the Idea Exchange organised by The Indian Express, the CEA said enhanced fiscal space could be used to push demand by focusing primarily on infrastructure. Subramanian, however, expressed caution about a possible second wave of Covid which may adversely impact the economy even without a lockdown.

Fiscal spending is important to push demand to bring the economy back into its vitality, the chief economic adviser said. “If you look at the Great Depression, or other periods of growth slowdowns… In India itself, following the Asian financial crisis, we had the GDP growth rate in 2000, 2001 and 2002 of 3.8 per cent, 4.8 per cent and 3.8 per cent, respectively. And it was fiscal spending together with reforms then that actually ended up bringing growth back to 8 per cent plus up until the global financial crisis. So, given that economic crises are one that originate from slackness in demand, the role of fiscal policy in furthering demand is what economists advocate. So from that perspective, I would say there is scope for fiscal spending in the remaining months especially given the fact that India is going to have a current account surplus,” he said.

Subramanian said the economic recovery since a 23.9 per cent GDP contraction seen in the April-June quarter and since the unlock phase has been robust. “The recovery since Q1 and since the unlock phase began has been robust… the manufacturing recovery has been far more robust than the service sector recovery and this has been displayed through several indicators… the PMI for September was at a seven-month high and it has since increased. The levels of activity are not only back to pre-Covid levels but even compared to last year at the same time, they are doing well. For the service sector, the October PMI has now come close to 53, which suggests that despite some sectors which are far more impacted by social distancing like travel and tourism, the other sectors are covering up and things are improving. What we are seeing is a two-paced recovery, with a V-shaped recovery that I had mentioned after the Q1 numbers,” he said. He, however, expressed caution about an impending second wave of the Covid pandemic. “I would though continue to be cautiously optimistic especially given the second wave that has come in Europe, especially because of the winter months and given our festive season and onset of winter season in the north. I think that’s one downside risk which I want to be definitely cautious about. I say this is because in the Spanish flu pandemic, the second wave was far more devastating than the first wave. So, it is important to keep that in mind, precautions and all the necessary steps we have been taking to control the pandemic must continue with as much intensity so that we don’t have a recurrence. Because even without any lockdown, if the pandemic numbers do rise, that will bring back uncertainty in terms of consumption which is something which we have to guard against. That’s the caveat which I would mention,” he said.

The Department of Economic Affairs under the Finance Ministry in its monthly review released last week had also cautioned about the adverse risk from a second wave of the pandemic on the economic growth, which it has otherwise projected to reach pre-Covid levels by the end of the financial year.

The detailed transcript of the Idea Exchange will be published in The Indian Express on Monday.

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