Needed: Policy debates

The contraction in industrial production narrowed in June and the index of industrial production registered a decline of 16.6 per cent, compared with 33.8 per cent in May and 57.6 per cent in April. The relaxation in industrial activity resulted in a pickup on a month-on-month basis. However, it remains to be seen if the momentum can be sustained as some high-frequency indicators have already started showing signs of faltering. More broadly, the fact that the Indian economy was slowing with stretched public finances and a struggling financial system even before the pandemic could make sustainable recovery more difficult.

Since the sharp contraction in economic activity is a result of the nationwide lockdown imposed by the government to contain the spread of Covid-19, it is critical to ensure that the country is in a position where all parts of the economic ecosystem are allowed to function. The continued spread of the virus has resulted in intermittent localised lockdown, which is affecting both demand and supply. Prime Minister Narendra Modi discussed the Covid situation with chief ministers on Tuesday and rightly highlighted the need for more testing in key states. Although India has improved capacity over time, it is still not testing enough. While the need for increased testing and containing the pandemic cannot be overemphasised, the government also needs to constantly review its policy response to contain the economic damage and ensure a sustainable recovery. Since it is truly an exceptional situation, it is critical to have a wider debate on possible policy choices. 

In this context, the government should take on board the suggestions put forward by former prime minister Manmohan Singh in a recent interaction with the BBC and in an article published in The Hindu with his party colleague Praveen Chakravarthy. Dr Singh argued in favour of cash transfers, providing adequate capital to businesses through government-backed credit guarantees and fixing the financial sector. Though the amount can be debated, the government is doing direct cash transfers. It is also distributing free food grains, which seems to be working well. It has also introduced credit guarantee programmes for different businesses. But fixing the financial sector, which is dominated by state-owned banks, would require both capital and deeper reforms. Doing this would be crucial for economic recovery. A few other points made by Dr Singh also deserve attention. First, given the health and economic challenges, higher government borrowing is inevitable, which will push up the debt-to-gross domestic product ratio. The government should not hesitate from borrowing but it should be prudent in spending. However, he cautioned against direct monetisation and argued that it should only be used as the last resort. Second, as noted by several other economists, protectionist policies can undo the economic gains of recent decades. The government should revisit its trade policy decisions.

Overall, the government would be well advised to engage the Opposition and other stakeholders in policy debates in these trying circumstances. This will not only help in taking better decisions, but would also make it easier to implement them. The government, for instance, would need to review the fiscal policy and come up with a new medium-term framework, which might require hard decisions. A wider consensus would make the policy path less difficult.

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