IAS Gyan

Daily News Analysis

Rebuild India’s confidence, revive the economy  

3rd August, 2020 Economy


  • People are gripped with the fear of disease and death from COVID-19. Such a heightened sense of anxiety among people can cause tremendous upheavals in the functioning of societies. Consequently, disruption of the normal social order will inevitably affect livelihoods and the larger economy.
  • There is unanimity among economists that the global economy will experience one of its worst years in history. India is no exception and cannot buck the trend.


An event with deep impact

  • Economic contraction is not merely a GDP number for economists to analyse and debate. It means a reversal of many years of progress.
  • A significant number among the weaker sections of our society may slip back into poverty, a rare occurrence for a developing nation.
  • Many enterprises may shut down. An entire generation may be lost due to severe unemployment.
  • A contracting economy can adversely impact our ability to feed and educate our children owing to a shortage of financial resources.


Confidence of People:

  • The foundation for reviving our economy is to inject confidence back in the entire ecosystem. People must feel confident about their lives and livelihoods.
  • Entrepreneurs must feel confident of reopening and making investments. Bankers must feel confident about providing capital.
  • Multilateral organisations must feel confident enough to provide funding to India. Sovereign ratings agencies must feel confident about India’s ability to fulfill its financial obligations and restore economic growth.


On NREGA and cash support

  • At a time when agriculture activity has been robust, data show that just in the month of June, 62 million people demanded work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme at minimum wages.
  • It is evident that most of them are displaced non-agricultural workers, struggling to make ends meet. Such is the scale and enormity of despair in our labour force.
  • A meaningful cash transfer can restore confidence in these families.
  • Money in the hands of people can provide an immediate sense of security and confidence, which is the cornerstone to restoring economic normalcy.
  • In the United States, as per reports, nearly three-quarters of unemployed workers received higher pay and benefits under their government’s COVID-19 assistance than from their employers.


Look at the financial system

  • COVID-19 assistance measures undertaken by the Reserve Bank of India (RBI) and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps, but they have largely failed since banks are not confident of lending.
  • Reviving the health of the banking sector is not merely about capital infusion or disinvestment of public sector banks.
  • Allowing institutions such as the RBI, public sector banks, bankruptcy boards, securities and insurance regulators to function freely and professionally is the foundational step to restoring confidence in the financial system.
  • It is critical to allow processes such as the insolvency process to function smoothly without intervention. If there is confidence among people to spend and among bankers to lend, then the private sector will spontaneously derive the confidence to reopen and invest.
  • Corporate tax cuts, such as the one announced last year, are misguided luxuries that will neither boost private investment nor are fiscally affordable.


Government needs to borrow

  • India must make full use of loan programmes of international institutions such as the International Monetary Fund and the World Bank.
  • Some have opined that India should hark back to the old ways of deficit monetisation by the RBI, also known as printing money. Deficit monetisation imposes high intangible and institutional costs, as we have experienced in the past. It is perhaps prudent to adopt deficit monetisation as the last resort when all other options are exhausted.


Setting things right

  • It is important to enlarge one’s diagnosis of India’s economic woes from mere GDP numbers to the underlying sentiments of fear, uncertainty and insecurity prevalent in people, firms and institutions.
  • Restoring confidence in people through direct cash assistance and other welfare programmes can help them live their lives and spend.
  • Restoring confidence among bankers through autonomy of institutions and processes will help them lend.
  • Restoring confidence among businesses with greater access to capital will help them invest and create jobs.
  • Restoring confidence among international organisations by re-establishing the credibility of our institutions will help get funding assistance and objective sovereign ratings.


Without being lured into complacency over illusionary recovery of headline numbers, the path to India’s sustained economic revival is through the philosophical pursuits of improving confidence and sentiments of all in our society, using the economic tools of fiscal and monetary policies.