Prioritising expenditure

The national income data released on Monday showed that the economy was gathering momentum. The real gross value added in the January-March quarter increased by 3.7 per cent, year-on-year (YoY), compared to a contraction of over 22 per cent in the first quarter of the last fiscal year. Growth in manufacturing and construction sectors also underscored that the economy was coming back on track after a record contraction in the first half of 2020-21 because of the Covid-induced national lockdown. But the second wave has derailed that recovery. Most states have imposed lockdowns to contain the spread of the virus. The April-June quarter is expected to still show a large growth on YoY basis as lockdowns this time are not as stringent as last year, but the economy is undoubtedly contracting on a sequential basis. Disruption in economic activity has led to renewed demands for fiscal stimulus.

Several commentators have argued in favour of large fiscal intervention through simply printing currency. Similar suggestions were made even last year, but the government did well to avoid such steps. Deficit monetisation or unchecked fiscal expansion can increase financial stability risks with longer-term consequences. India’s debt-to-gross domestic product (GDP) ratio has expanded to about 90 per cent. But this is not to suggest that the government should not do anything. The Union government did run a fiscal deficit worth 9.3 per cent of GDP in the last fiscal year. Union Finance Minister Nirmala Sitharaman said in an interview this week that the Budget was designed for a Covid-affected economy and will go down to the people.

However, the condition on the ground has changed significantly since the presentation of the Union Budget on February 1. The government needs to focus on providing relief to people who have lost jobs because of lockdowns. There is no dispute that the government should increase capital expenditure to crowd in private investment, which will help boost growth over the medium-term. But at this juncture, the priority should be to provide relief. The government has done well to restart the free foodgrain distribution programme for the vulnerable sections of the population. It is also open to increasing allocation under the Mahatma Gandhi National Rural Employment Guarantee Act. But this may not be enough. Economic disruption over the last 14-15 months has pushed a large number of people into poverty. The government should look for ways to support them through cash transfers. Identification could be a problem, but some state governments are working in this direction. The Tamil Nadu government, for instance, is giving cash to ration card holders. It’s always better that such measures are implemented by state governments, but the Union government should provide financial assistance.

To be sure, the problem has worsened for India because of the slower pace of vaccination. Thus, the government should do whatever it takes to increase the pace of vaccination substantially. Without vaccinating a significant proportion of the population, states will be reluctant to remove restrictions on public mobility, and rightly so. The slower pace of vaccination will also increase the risk of another wave, which will again hurt the poor disproportionately. Therefore, the government should prioritise relief and vaccination at this stage. Higher capital expenditure is unlikely to push up growth on a durable basis till the risk of infection is not conclusively contained.


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