Does Indian economy have the potential to rebound fast after the COVID-19 crises

Rahul Sinha & Monishankar Dutta

“When we are aware of our inner growth potential yet have no pretentions about ourselves, when we are vulnerable, then we can change.”
     – Amit Goswami

Undoubtedly, India needs strong leadership & effective planning to strengthen its economy. The crisis turned a lot of tables. Some countries emerged as the new global powers in terms of technology and resources whereas some countries lost their hold and global authority. The pandemic also taught us the importance of developed infrastructure and healthcare facilities. The factors of growth are in favor of India. India has a huge labor force consisting of 500 million people and a well-established consumer market. These factors are enough to recover after a global pandemic. The recovery of our economy dwells upon the productiveness and the health of our population.

India must focus on a planned and systematic recovery process that starts with- defeating COVID-19, calculating and analyzing the social and economic costs, maintaining health and infrastructural structures, and finally getting back to work. Certain studies have claimed that the social distancing measures must be maintained until 2022 as the virus may stay and not fully obliterate. The above-mentioned problems can be solved by reviving the nation's core sectors, creation of demand, generation of employment, and circulation of currency.

Prime Minister, Shri Narendra Modi has suggested a path towards de-globalization or “Atmanirbharta” which was first introduced as a protectionism mantra by Jawaharlal Nehru after independence. From the “Atmanirbhar Bharat” plan we can interpret that the protectionism laws and policies will become more effective and stringent by the end of 2020.
We believe that India can re-emerge amid the global crisis as it is recognized as a land of opportunities.

The reverse migration due to the pandemic provided an opportunity to engage the laborers in gainful employment. Our agricultural sector accounts for 14% of our GDP and can recover quickly if effective plans are implemented and investments are truthfully realized. The government has already announced a 20-lakh crore package for sectorial boost and favors our agrarian economy. 3rd tranche mainly focuses on the agricultural sector. The agricultural stimulus is of Rs.1,50,000 crores according to the distribution of the economic package. The MSMEs have been the key focus of the government and the economic advisors it constitutes around 30% of the nation’s GDP, other sectors like metal and mining industries, the generic pharmaceutical industry are a part of our economic lifeline. The lockdown has undoubtedly disrupted the supply chains and agricultural activities. There will be a 40,000-crore boost in spending for the “Mahatma Gandhi National Rural Employment Guarantee Act” which will help to generate work for the affected laborers.

A provision of 30000 crores has been created as “Additional Emergency Working Capital” for farmers through NABARD. Rs.2 lakh crores credit has been ascertained to boost 2.5 crore farmers under “Kisan Credit Card Scheme”. The primary agriculture cooperative societies, farmers & producers’ organizations, and the agricultural entrepreneurs have been allotted finance facilities of Rs.1,00,000 crore and a scheme of 10,000 crores has been formulated for the Micro Food Enterprises.

The fisheries and hatcheries have also been taken care of. The permits for the hatcheries expiring on 31st/3/2020 had been extended for 3 months. Certain reforms for the governance and administration for the agricultural sector has also been made, a barrier-free inter-state trade and e-trading of agricultural produce has been announced. If we take a look at the trend of the Indian economy during the pre-COVID period we can observe that the GDP rate was on a downward trajectory with the annual growth rate falling 6.04% from 2018-2019 to 3.89% in 2019-2020 which is lowest since 2002-2003. Now about 30% of this GDP comes from the industries which majorly consists the micro, small, and medium enterprises or in other words the MSME sectors and provides employment to around 120 million peoples.

Given the backdrop of the weak economy, the pandemic of COVID-19 is creating two major commotions for these industries in two ways one in the supply side of it and the other one in the demand side. If we look at the supply side disruption of the MSME sector the main cause for the disruption is due to the non-availability of loanable funds and disruption of the labor services. The availability of loanable funds is important for this sector as it functions as a source of credit, now due to this COVID-19, the banks have stopped giving credit facilities to this sector, as due to the lockdown no business activities are taking place as a result, the banks are not assured about the repayments of the loanable funds. Now coming to the labor part to control the spread of the virus the government has announced only 50% of the labor force can be employed in factories at a time as a result of which the factories cannot yield at its full potential and production has substantially declined. Now if we observe the demand side disruption it is mainly occurring due to the lockdown situation, due to lockdown, most people are out of their jobs as many firms are not able to provide salaries to their employees. Due to this problem, most people are out of their income as a result demand for products has declined. To boost the MSME sector the government announced some relief packages. If we look at the salient fiscal packages announced by the government to boost the MSME sector include Collateral-free bank loans of up to Rs.3 trillion to MSMEs with 100% credit guarantee and Government investment of Rs.100 billion in funds that in turn will invest Rs.500 billion in the equity capital of MSME. A key constituent of the ‘fiscal package’ is the MSME loans backed by 100% government assurance.

Given the risk repugnance in the banking system, the government must step in to bear some of the credit risks, so that banks can do what they are good at, which is, assigning capital. A credit guarantee scheme is a step in the right track. Another benefit is that the government won’t be affected immediately due to the credit guarantee. But some loopholes must be rectified, the credibility of a credit guarantee scheme and the lenders trust in it depends a lot on the details of the scheme. There may not be any take-up until the government clarifies the system of the scheme, for example, the conditions imposed on the availability of the guarantee and the timeline to make claims.

To conclude we must say that the government has correctly recognized the two sectors (Agriculture and MSMEs) that have immense potential to change the game and help India not only to fight back but win over COVID-19 and set an example for the rest of the world. The economic advisors have shown the correct path but the implications and the loopholes pointed out throughout the essay must be taken care of. There must be proper and unbiased allocation of funds. The primary and the only concern must be the welfare of the public, our farmers, and entrepreneurs. This is an opportunity for our nation to rectify its previous policy measures, whether it be fiscal or monetary.

Rahul Sinha & Monishankar Dutta are both students of St. Xaviers University, Kolkata

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Jun 19, 2020

Rahul Sinha

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