How consumption will get affected due to the pandemic?
India’s growth forecasts are now 1-2 percentage points lower due to the second wave of coronavirus.
But the actual economic toll may be higher and consumption demand may remain subdued longer than currently foreseen and there are sufficient reasons to justify this fact.
One, lethality of virus and its spread, severe human and economic scarring, fear-persistence due to the anticipated third wave, and lack of guaranteed vaccination will affect the consumption.
This is in addition to the drained financial strength from health expenses and income losses, increased indebtedness.
Two, the supply-side stress are also affecting the consumption pattern.
MSMEs are affected by shutdowns which affect their sales, raw material procurements and supply chain linkages.
Large firms are impacted by labour shortages due to migration, infections, lowered sales and future demand uncertainties.
As a result there is feeble demand for credit and loan restructuring in the banking sector.
Three, it is expected that reopening the economy will be accompanied with more infections in forthcoming months which will reduce demand.
What are the steps to be taken?
It is advocated that budgeted expenditures should be reoriented to meet the emergency health and income requirements.
The government should act along the structural lines and prepare a fiscal space for this emergency of unknown magnitude and longevity.
It must follow the efforts of deepening the revenue-expenditure reforms as it did last year.
This involves reforms to agriculture marketing and institutional structures, accounting transparency by bringing subsidy arrears (food, fertilisers) on the balance sheet, raising LPG prices.
What is the issue in this?
Recently, there has been regression with the increase in fertiliser subsidies instead of revising issue prices.
This can derail the reform momentum and diminish the credibility of effort and commitment to improve finances.
Therefore any reform should aim to reduce subsidies over the medium-term in a modest fashion.
For example, it can choose between different ways to moderate the food subsidy, i.e. streamlining the beneficiary eligibility and numbers or revising the issue prices or a mix of both.
Other welfare and often populist expenditures, at both state and central levels should also be reviewed.
What is the inference?
This stretching pandemic of unknown duration and spread will worsen the employment-income situation of the people.
RBI cannot alone lead with its monetary measures and fiscal policy measures needs to be taken.
With general government debt touching 90% of GDP, debt sustainability and macroeconomic stability are now a binding restriction.
The government should revise the fiscal rules (the FRBM Act) or present a detailed medium-term fiscal adjustment plan.
So any action which is taken should impart strength and confidence to overcome revenue shortfalls, reduce the exceeding expenditure limits without raising the debt sustainability concerns.
