Former Prime Minister Manmohan Singh and senior office-bearer of the Congress party Praveen Chakravarty wrote an op-ed article in The Hindu on Monday, warning the Narendra Modi government against deficit monetisation as the coronavirus pandemic ravages Indian economy.
Singh said the path to a sustained economic revival is to improve the confidence of people and to immediately transfer cash to the poor amid the “extraordinarily difficult times” by using the economic tools of fiscal and monetary policies.
He pointed out that the Indian economy will contract significantly for the first time in many decades and cautioned that it will have a “deleterious impact” on the poor. “India entered the Covid-19 crisis in a precarious position, with slowing growth, rising unemployment and a choked financial system,” the authors said. “The epidemic has manifestly made it more painful.”
The 87-year-old leader said India is probably the only large democracy that has not given direct cash assistance of a significant amount during the coronavirus crisis. “There seems to be a misplaced sense of apprehension that providing large cash assistance may deter people from returning to the workforce when needed and starve industry of labour,” he added. “Such fears are stale and unfounded.”
He cited reports that nearly three-quarters of unemployed workers received higher pay and benefits in the United States as part of the government’s assistance.
“A heightened sense of anxiety among people can cause tremendous upheavals in the functioning of societies,” Singh wrote. “Consequently, disruption of the normal social order will inevitably impact livelihoods and the larger economy... 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.”
Singh said India cannot afford to be fiscally restrained and said the measures undertaken by the Reserve Bank of India to tackle the pandemic “have largely failed” as banks are not confident of lending. “A large direct cash assistance to people, improving capital adequacy of banks and providing credit guarantee schemes for corporates require significant financial resources,” he added. “Government finances are already stretched with a major shortfall in revenues. New avenues for tax revenues are not feasible in the short term.”
The economist suggested that the Centre must take loans from international institutions like the International Monetary Fund and the World Bank. “Our long track record as an impeccable borrower with no default, timely repayments and full transparency make us an ideal borrower for these institutions,” the Congress leader wrote, stating that this will also be not enough though.
A contracting economy, Singh wrote, can push a significant number among the weaker sections of the society back into poverty, shut down many enterprises, cause severe unemployment and impact citizens ability to feed and educate their children due to a shortage of financial resources. Singh claimed that the government’s attempt to divert attention from these problems via “choreographed events and illusionary recovery of headline numbers” will not make them disappear.
“It is thus imperative to act with utmost urgency to nurse the economy back to good health,” he said. “The slowdown in economic activity is both a function of external factors such as the lockdown and behavioural changes of people and enterprises, driven by fear. “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 fulfil its financial obligations and restore economic growth.”
The Congress leader said the central and public banks should function freely and professionally to restore the confidence of people. “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,” Singh said. “When firms feel confident of availability of capital and consumers, they do not need much else to kick-start production and investment.”
The finance ministry, in a report released on July 6, said that India’s gross domestic product is expected to contract 4.5% in the 2020-’21 financial year as predicted by the International Monetary Fund. The ministry cited the “unprecedented Covid-19 induced supply-demand shocks” for the downward revision of the economic growth.