By early recognizing the need for action on the supply side and maximizing taxpayer value for money on the demand side, India has been able to insulate itself at a time of high economic volatility globally. world.
Representative image. News18
With the US, EU and much of the western world heading firmly into economic recession, many economists have been puzzled as to why India continues to post strong numbers on economic markers, suggesting that India seems to remain sheltered from global economic upheavals. To understand why India remains financially sound, it is essential to understand what caused this global recession in the first place.
At the onset of the Covid-19 pandemic in early 2020, when most countries imposed movement restrictions with a significant impact on businesses and therefore on incomes, the fallout on supply and demand dynamics demand have destabilized even the most advanced economies. Nations have been compelled to take urgent macro-policy measures to counter this sudden crisis. The countries tried to find a political solution along the lines of the fundamental theories advocated by renowned economists John Maynard Keynes and Friedrich von Hayek. Both published their work in the mid-1990s with contrasting approaches.
While Keynesian theories massively propagate substantial government spending in times of crisis to boost consumption, Hayek’s work theorizes that extreme government control leads to long-term stagnation due to interference in the natural forces of the market. Most nations have followed Keynes’ approach of vigorous government intervention through huge expenditures in the form of handouts and putting money in people’s pockets. They hoped that such measures would awaken demand and boost the morale of companies which would then hire more people. In retrospect, it was this thought that seemed like a total miscalculation since artificially stimulating the economy on such a macro scale inevitably leads to inflation, followed by a downturn.
Conversely, Indian economists believed that the way out of a crisis that only happens once in a century like the Covid-19 pandemic would be to take policy measures that were an amalgamation of the two theories. If we only followed the Keynesian approach, because of our population, filling several billion pockets would put a strain on our public treasury. On the other hand, letting nature take its course with minimal government interference, as Hayek preaches, would push our most vulnerable people into undesirable circumstances. Furthermore, Prime Minister Modi strongly believed that giving cash in hand to all Indians would be counter-productive – it would not create that increase in spending needed to stimulate demand envisioned due to the inherent saving nature of Indians. versus spending, especially during tough times.
Being fully aware of the longevity of the pandemic crisis of this nature, many world renowned economists (including Nobel laureates) had started preaching to us that India’s economic response should be a big package of reinflation in which we would be spending a lot of money trying to reinflate the economy as early as April and May 2020. However, instead of exhausting all our ammunition early on, Prime Minister Modi, on the balanced advice of his economic advisers, was d I thought we were in a marathon that would take us through uncharted terrain versus a quick sprint with an end in sight. Thus, we must be prepared for unexpected surprises. Realizing all of the above, India has adopted a “modified dumbbell approach”.
As described in Modern Economics, a modified barbell approach meant that instead of a one-size-fits-all, big bang fiscal package, India would take slow, measured action, incorporating feedback from the field from time to time. We were fully aware that simply reviving the economy through increased government spending would surely lead to high inflation and even stagnation if combined with low growth rates.
The most vulnerable were taken care of first, and to ensure that no Indian went hungry, over 80 crore Indians received food grains. This type of in-kind transfer of grains and pulses helped the government avoid excessive budgetary costs, as it could tap into its existing reserves created by its food supply policy and use its already functional food distribution system to meet Requirement. Using the 40 crore Pradhan Mantri Jan Dhan Yojana bank accounts created after Prime Minister Modi took office in 2014, India was able to quickly transfer money to the very poor without leakage due to systemic errors and Corruption.
In order to have a multiple impact on spending, key areas of aggressive spending such as infrastructure, structural reforms to ease supply-side frictions, and incentives for businesses to increase production have formed the pillars of India’s economic response. From the beginning, to avoid the worst scenario of bankruptcy, India provided government guaranteed loans to MSMEs, taking into account granular information details of borrowers tracked by our financial sector (reducing the risk of default) . In June 2020, when India started to unblock, several economic indicators started showing encouraging growth markers. Observing signs of improvement by collecting data from the ground, India increased its capital expenditure in areas that had the potential to generate multiple returns like infrastructure, including transport infrastructure construction activities . India’s GST collections topped Rs 1 trillion after 8 months on strong growth markers such as reduction in unemployment rates to pre-Covid levels, a strong NIFTY index above that of the previous year , a pick-up in industrial activity, substantial improvements in port and rail freight traffic, and power generation—indicating that India was heading for a V-shaped economic recovery—a full rebound.
To date, India has been able to control its inflation and keep it in single digits while most advanced and emerging economies struggle to control rates even at 14-15%. By early recognizing the need for action on the supply side and maximizing taxpayer value for money on the demand side, India has been able to remain relatively stable and insulate itself in this time of high economic volatility. worldwide.
Priyam Gandhi-Mody is a political communications strategist and author. His latest book is “A Nation to Protect: Leading India through the Covid Crisis”. The opinions expressed are personal.
