Supply eased, now revive demand to spur growth: Govt must step in, RBI may not offer more sops

The government must spend on capital expenditure immediately to prevent the economy from sliding further.

In an economy recovering from the first wave of coronavirus pandemic, supply-side snags eased during the January-March quarter while demand was still fragile. As India once again attempts to reboot the economy, the demand issues need to be addressed while policy-makers carve out plans, economists said. “Barring a severe third wave (which remains less likely), the pace of economic recovery would be more dependent on demand,” said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stockbroker. The second wave curtailed the spending power of households as jobs losses accelerated to 15 million in May, according to CMIE. The unemployment rate shot up to 11.9% from 8% in April.

How to boost demand?

The government must spend on capital expenditure immediately to prevent the economy from sliding further, said Madan Sabnavis, Chief Economist, Care Ratings. He added that more demand is needed to spur growth. “It should be more of demand… we need to see higher consumption and investment. Right now with the pandemic affecting several families, the power of consumption has come down. Also with several deaths recorded, families will tend to cut back on discretionary expenditure. Therefore push from investment by the government is needed.”

R Nagaraj, Visiting Faculty, Center for Development Studies, too proposed an increase in government expenditure. “The government’s first task should be to support the consumption and livelihoods of the poor by a massive expansion of government current expenditure, ignoring the rise in fiscal deficit for some time being. Such an effort will restore household consumption demand and hence boost output,” he added.

RBI’s hands tied, government intervention needed

With RBI having done its part throughout 2020, it may now be time for the government to step in again, said Deepthi Mathew, Economist at Geojit Financial Services. “Consumption being the backbone of the Indian economy, the focus should be on reviving the consumption demand in the economy. The second wave of the pandemic has heightened the degree of uncertainty in the economy. The government should step up as there are limitations on the RBI to announce any further stimulus measures,” she added.

“At a time like this, Keynes’s theory can rescue the economy from falling into low demand and low supply trap,” Rumki Majumdar, Economist, Deloitte India told Financial Express Online while batting for government spending to increase. “With finite resources, the government has to be prudent about spending. Recent data suggest that government infrastructure projects have picked up at a rapid pace,” Rumki Majumdar said. Amid the pandemic, highway construction grew by 74% on-year in April–May of FY2021–22. “Such spending will result in a higher multiplier effect on income, jobs, and assets and thereby, spur demand and investment in the economy.”

Supply revives but demand remains weak

Leading up to the first quarter of the financial year 2021-22, supply-side was seen to be in the recovery phase. “Supply conditions had evened out (during last quarter) and the bottlenecks that were there for manufacturing got eased over time. This can be seen by the increase in E-way bills that were clocked,” said Madan Sabnavis, Chief Economist, CARE Ratings.

During the January-March period, the domestic economy was operating at the best pace since the pandemic began. High-frequency indicators were hinting at normalisation picking up steam with re-opening at full steam. Despite this, the demand-side had some issues. “Government spending remained a key driver, adding 2.7pp to GDP figure. Excluding government expenditure, GDP contracted by 1.1% on-year, while excluding agricultural activity, would take that to a steeper 1.8% on-year reduction,” said Rahul Bajoria, Chief India Economist, Barclays. “Weakness in investments continues and is part of a slowdown being witnessed from the early 2010s, which needs a deeper solution,” he said.