A Rocky Road to Recovery

The Indian economy has technically entered into a recession after contracting by 8.9% in the third quarter on a year-on-year basis. India’s GDP contracted by a record 23.9% in the second quarter, making it one of the worst-hit economies among the G20. However, after reaching a peak of 93,000 cases in September, the number of cases in the country are on the fall. Lockdowns and business restrictions have been eased, and the economy has been showing signs of recovery.

However, recovery has been somewhat patchy. The manufacturing sector, which accounts for nearly 14 per cent of GDP, hit a 10-year high in October, according to the IHS Markit Purchasing Managers’ index. Goods and services tax collection also rose to an eight-month high of about $14.4bn last month, up 10 per cent from October 2019. However, not all sectors have witnessed a similar rebound. The services sector is still struggling with pre-COVID levels of production. Travel & tourism and housing sectors are among the worst hit and are still struggling to pick up the pace. Economic recovery is much more complicated than just ‘restarting the economy’. We shall explore various dimensions relating to economic recovery, drawing comparisons from the 2008 financial crisis and then look into the recovery trends in China recently.

UNDERSTANDING STIMULUS BY THE GOVERNMENT

The government plays a central role in kick-starting the economy. Even in capitalist economies, the private sector cannot be expected to lead the path to recovery. Recovery requires massive investment and spending. No profit loving entity will be interested in investing during a recession. It falls upon the government to support and provide incentives to spur economic growth.

However, the government has limited fiscal space, and there are limitations to its spending as well. Massive investment and expenditure are required from the government’s side on the face of dwindling incomes due to the slowed economy. The government has to increase taxes, cut spending or borrow to meet its expenses. As discussed above, the government cannot cut spending during the times of slowdown or recession. Increasing taxes is highly disfavoured by economists as raising taxes will inhibit economic activity in the already struggling economy. This can lead to a further shortfall in tax collection, sending the economy spiralling downward. The only option remaining with the government is borrowing.

Insights about government spending

However, the government cannot widen its deficit indefinitely, or in other words, it cannot borrow as much as it wants. When a government maintains a deficit (when expenditure is more than revenue), that amount is added to the debt pool of the government every year. The burden of this debt pool is then passed on to future generations. In general, governments maintain a deficit because it is hoped that this debt will be easier to repay for the future generations who will have access to better technology and means of production. However, widening the deficit by too much can lead to an excessive burden on the future and thereby can become a cause for stunted economic growth in the future.

Combating the 2008 financial crisis became a priority for all the governments after it unfolded. However, many developed economies such as Japan, and many European countries have an ageing population. Therefore, this posed a serious challenge to the policymakers as raising too much debt and passing it on to the future generations could have adverse implications. This put a limitation on these countries to provide a stimulus for growth. Countries like India and China who are predominantly young have the option to raise the debt and provide stimulus to the economy and pass the burden to the future generations. Therefore, many economists advise the government to give priority to spending rather than worrying about the fiscal deficit in the present scenario.

In addition, if the government fails to repay the loans, it creates a dent in the confidence of the lenders. This pushes up the interest rate making borrowing costlier for the government. Therefore, spending too much can lead the way to another economic slowdown in the future. Greece was perhaps the worst hit economy due to the 2008 global financial crisis. As discussed above in the text, Greece has a victim of excessive borrowing. As buyers started doubting it’s economic prospects, they started demanding higher returns for their loans. By 2010, Greece was paying 3.25 % interest than Germany, which further aggravated its financial problems.

Spending too less will not provide growth for the already nascent economy and can inhibit economic growth. The government has to maintain a tight balance on its spending. Its extent of the expenditure not only depends upon the current economic scenario but also on other factors such as demography, technological advancement etc.

The timing and efficiency of a stimulus are very critical. Spending the right amount in the right area at the right time will lead to maximum economic recovery. Many governments around the world have been accused of spending too much initially and then spend too little when the economy starts picking up, leaving it unsupported. Economists believe that instead of coming up with a single large stimulus package, it is more efficient to phase out the spending while targeting critical areas gradually.

The Indian government has come up with Aatmanirbhar Bharat 3.0 recently, focusing on employment, housing and infrastructure, MSMEs etc. Although India has been showing a robust recovery (on the whole), it remains to be seen how this package helps in recovery of the Indian economy.

UNEMPLOYMENT

There is a marked rise in unemployment during any crisis. The figure shows the increase in the unemployment levels during the lockdown and its subsequent decline after easing the economy.

However, the impact of unemployment is different across different sections of society. In the case of India, the blue-collar workers (labour class) suffered more job losses when compared to the white-collar workers (managerial class). According to the CMIE, job recovery for women in India is much slower when compared to that of men.

It is also seen that it is more difficult for the younger population to regain jobs. The lack of experience makes access to jobs tougher for this set of population. This has a scarring effect, i.e., the lack of experience among youth due to unemployment caused due to the crisis makes them even more susceptible to be unemployed in the future. This leads to a long term impact on the economy and the workforce of the country.

Therefore, economists argue that the relief package for employment provided by the government must be tilted in favour of the youth. The government must focus on incentivising the private sector to provide internships and indulge in skill-building operations.

Germany fared much better than many developed economies (it is hard to draw comparisons with the developing countries as a majority of the workforce is involved in the informal sector) of the world concerning youth employment during the 2008 financial crisis. This was due to the strong apprenticeship programme and adequate support provided by the government in Germany. A youth was four times more vulnerable to unemployment when compared to an adult in Sweden, whereas this number was 1.5 for Germany.

The scope of the government to be a significant employment generator is limited in a capitalist economy. Also, it does not lead to long term stable employment. Instead, there must focus on reviving employment by incentivising the private sector.

EXPERIENCE FROM CHINA

The world’s second-largest economy was the only major world power to avoid a recession this year as Covid-19 forced lockdowns and crippled businesses. China’s GDP is expected to grow 1.6% this year, while the global economy as a whole will contract 5.2%, according to summer projections from the World Bank.

Tourist spending, meanwhile, recovered to nearly 70% of last year’s level, reaching $70 billion. And movie ticket sales surpassed $580 million during the Golden Week holiday. Consumer spending is rebounding, too, in yet another encouraging sign. Economists were concerned earlier this year that China’s recovery was too unbalanced, having been driven by lots of state-led infrastructure projects and not enough consumer spending. And despite trade tensions, China’s economy has also benefited from its vital role in global supply chains. Even after a deteriorating relationship with the USA, US foreign direct investment into China rose 6% in the first half of this year, according to China’s Ministry of Commerce.

However, there has been an increased rich-poor divide. The average monthly income collected by rural migrant workers fell nearly 7% in the second quarter compared to a year earlier, according to World Bank estimates that used Chinese government data. Organised business and conglomerates are have expanded, and there has been a decline in the income of unorganised and informal sectors of Chinese society.

CONCLUSION

It is reasonably evident that recovery will not be uniform. The impact of a financial crisis is usually more on services and manufacturing sector when compared to primary activities sector. Financial crisis can result in a widening gap between the rich and the poor. Strategic spending is the key to this problem. Also, investments on green energy is a path that the government can bank on. China showed massive strides on renewables after the 2008 financial crisis, after the Chinese government spent heavily on this front. This aids not only economic recovery but also combats environmental degradation and provides energy security. The trends in the recovery of the Indian economy remains to be seen.

Bipul