What has government planned to revive economic growth?

You are currently viewing What has government planned to revive economic growth?

We read an interesting quote the other day that goes by,

“India seems to have sacrificed its economy to save lives. The US seems to have sacrificed lives to save the economy. That’s strange because we have been told that human life is cheap in India and precious in the US”

Isn’t it true?

Coming back to the article, the governments across the globe have been proactive in providing stimulus package and supporting the economy. The announcements were prompt and quick from these governments mentioned below. Well, had they been more stringent with the lockdown, the world would have more smiling faces. Isn’t it?

Below is the table on how much stimulus has been announced by some of the government worldwide and where India stands.
CountryStimulus Package (Dollars)
US1 Trillion
Germany600 Billion
UK400 Billion
Spain220 Billion
South Korea39 Billion
Italy28.3 Billion
India22.4 Billion

Coming to India, well it has been the most stringent in terms of lockdown. However, the economic response by the government would appear to be lacklustre especially if you consider the size of the economy and the package announcement recently. And remember this comes in the backdrop of an already slowing economy. So we took a deep dive into understanding what the government think tank is planning to revive the economy.

Firstly, we must understand that the already slowing economy has led to lower tax collection which in-turn has increased our fiscal deficit. This was pre-COVID, however, with more than a month of nationwide lockdown, the fiscal deficit trajectory has worsened due to a sharp drop in tax collections and immediate need to increase the spending. Till now the government has announced a package of nearly Rs. 1.8 trillion especially focused on the underprivileged. Going aggressive on spending would increase the risk of inflation, which will worsen our macros further.

Therefore in our view, the government has taken a different approach on how to tackle the economic crisis. While the government would continue to focus on providing jobs, healthcare, and food to the vulnerable sections of the society, it has somewhat put RBI at the forefront to tackle the rest of the economy. How? Simple, Credit, Credit, and Credit. The RBI has launched several Bazookas (if we may quote the newspapers) in the last one month with a clear message that if banks and NBFCs need liquidity, RBI is there. It has already given levy on NPA reporting. Further, it has lowered Reverse REPO to incentivise banks to lend. There are several other measures all focused on maintaining stability, adequate liquidity, and boosting credit flow.

Is it the right move?

Considering the current economic scenario, we believe it’s the right approach as the government can’t risk higher inflation as that will damage our macros. If we go the RBI route, there is no additional printing of money which means inflation is kept in check. However, higher lending from the banks during such times puts a great risk to our financial system. And that’s where the government will step in to bail out if any bank goes bankrupt. Further, in our view lending in such a scenario would largely be led by PSU banks.

In the medium to long term, things are definitely looking good for India as there will be an economic and emotional backlash against China and India fits in as the perfect alternative to China’s vast supply chain. It will help increase foreign investor confidence in India increase FDI investment. But this is a 2-3 year view as nobody wants to invest in such a scenario, therefore, what the government is trying to focus on is not to fiddle too much with our stable macros and restrict spending to only the vulnerable sections of the society and in the meanwhile try to revive the economy with the help of credit flow from RBI and banks.

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