Create the demand

– By Monica

Already India was facing contraction in the economy. Corona gave it another setback. 

Recent report by the IMF about the contraction of India’s economy by 10.3% gave us points to think about current government policies. It is true that in the situation of this pandemic the global economy is contracting and India’s position is amongst the worst affected ones. India was already facing the problems of unemployment , poverty , NPA, loss in automobile sector. The pandemic has added a few more like returning of workers from other states and other countries, reduction in consumption demand, loss of employment opportunities etc. 

To tackle this crisis the government has initiated many policies and schemes that can help our economy to recover and reduce the impact of the situation on the economy like the Atma nirbhar policy abhiyan, Garib kalyan yojana, along with other small policies. The atma nirbhar package is focused at providing loans to MSME`s , street vendors, farmers etc and under Garib Kalyan Yojana, a small amount of Rs 500/- is despoiled in the jan dhan account.

Through the Atma Nirbhar package the government is trying to do supply side improvements whereas the need of the hour is to generate demand. This top down approach of the government will take time and with lesser probability of degree of return, whereas the bottom up approach of giving some tangible amount of cash in the hands of the consumer along with some focus on the supply side will give the economy a major boost.

In its report, the IMF is trying to tell the same. The reforms suggested by the IMF are more towards generating demand than supply. Overall it should be a balanced mix of demand and supply side improvement. In its report it talked about greater international collaboration, policies should aggressively seek to limit persistent economic damage by giving cash transfers, wage subsidies, unemployment insurance to poor and tax deferrals, debt servicing moratoria, equity for firms. Policies should be facilitated in terms of transfer of workers from one sector to another and to catch up with the changing world. Governments should be supported by institutional grants, concession financing and debt relief. Easing monetary policy can prevent the buildup of financial risk and the most important one is independence of the central banks.  The IMF maintains that the independence of the central bank is crucial for the health of the economy. The central bank needs to function independently managing the overall monetary system. Tinkering with the functioning is not good for the overall functioning of the financial system. Healthy banking system is a symbol of a healthy economy.

We can borrow a page from our neighbour’s book, Bangladesh, whose per capita income is more than ours and is growing with a positive rate even in these hard times. Bangladesh trails us in basic education parameters, level of poverty is much higher than India, loosely regulated garment industry is known to cut corners on labour safety and onerous work conditions are beginning to have adverse health repercussions. With these problems, what saves its economy is non-stringent labour laws, women participation at large scale , industry led GDP, women’s political representation and low mortality rate. 

India does not need to copy any country but it needs to recognise its own problems correctly. The government terms the challenges facing us as cyclical in nature. What our economy needs, along with policies for ongoing cyclical changes, are crucial structural reforms. Generating demand should be included in primary motives of our reforms as well as policies.


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