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Wednesday, June 23, 2021

Arrest the slide

Government must provide more direct monetary help to poor, extend schemes for collateral-free loans to small businesses

By: Editorial |
Updated: May 28, 2021 8:03:43 am
There are several reasons why Kotak’s call for another round of fiscal relief packages is both timely and justified.

In an interview to this paper, Uday Kotak, the president of CII and MD of Kotak Mahindra Bank, has urged the government to provide another round of fiscal support aimed at protecting livelihoods, especially for the weaker sections of the economy. Kotak argued that given the widespread devastation due to the second wave of Covid-19, this is not the time for either the government or the companies to look at their financial balance sheets. There are several reasons why Kotak’s call for another round of fiscal relief packages is both timely and justified.

On February 1, when Finance Minister Nirmala Sitharaman presented the Union Budget for the current financial year (2021-22), it was assumed that the Indian economy had seen off the worst of the Covid threat. It was considered a foregone conclusion that India’s GDP will claw back all the loss it suffered in 2020-21, when it contracted by around 8 per cent, and would grow by over 12 per cent this financial year. But both these assumptions were proved to be off the mark. Thanks to the vicious second Covid wave, economists have been rapidly dialling down India’s GDP growth forecasts. It is even possible that, at the end of the current financial year (March 2022), India may not be able to get back to the level of absolute GDP it had in March 2020. An underwhelming GDP growth is merely a reflection of a much greater distress in the economy. For one, the second wave resulted in job losses and reduced wages across almost all income classes while making matters worse for the poor. As a result, people are expected to severely constrain their expenditures, especially on anything they consider non-essential. This, in turn, would delay, if not completely derail, the cornerstone of the government’s Covid recovery strategy — fresh investments from corporate India.

The key question facing the economy is: How will the demand deficit be addressed? As things stand, businesses will continue to hold back investments because there is not enough consumer demand, and consumers will not demand more because they do not have enough incomes. And this vicious cycle could get worse if the pace of vaccination doesn’t pick up or if there is a deadly third wave. Only one economic entity can break this cycle: The government. By providing additional direct monetary help to the poor and extending its existing schemes for collateral-free loans to small businesses, as Kotak has also suggested, the government can arrest the slide.

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