There is no denying that the global economy is set for a contraction. Financial agencies across the world have come up with their projections and unanimously acknowledged the great slump. As per CRISIL Research, India is set to bear a permanent loss of 4 per cent of GDP due to the pandemic. In layman terms, even in recovery, there will be a certain loss. Analysis such as this allows governments to see the worst aspect. But, they also set the benchmark for undertaking decisions that can help craft a rather optimistic trajectory. And, while the Crisil report states that India will have to bear a minimum loss of a certain percentage, it is still recoverable if India outperforms itself in the coming years. The Crisil report in this sense presents itself as a reminder for India to register, not only a V-shape recovery of its growth to 7.4 per cent in the next financial year as IMF predicts in its recent World Economic Outlook, but compound the momentum to register an unprecedented 8.5 per cent growth in the next three years. Analysis of this sort, therefore, projects a continuum from most pessimistic outlook to the most optimistic, leaving it on the government of the day to frame policies and act accordingly. Back in 2008 when the sub-prime crisis in the USA brought about the global financial crisis impacting economies, India took two years to return to the trend that it had been knocked off from. But to close down the permanent loss in GDP by 2011, the UPA government had to bring in a heavy fiscal stimulus. Such fiscal stimulus did bring India back on track in terms of GDP growth but at the cost of a wide fiscal deficit with Fiscal Responsibility and Budget Management (FRBM) targets blown out of proportion. From 4.9 per cent in 2010-11, India had a fiscal deficit of 5.9 per cent in 2011-12. So when Crisil suggests a similar fiscal stimulus to revitalise growth, the burden of a widening fiscal deficit can be anticipated. The unsustainable balance sheets of large corporates following the fiscal stimulus then had resulted in a large number of NPAs. Learning from that experience, India today plans to unveil a stimulus package for the MSME sector rather than the corporate sector. MSMEs are bearing the brunt of the downturn. Lacking large buffers, they are required to be nursed back to health, and a dedicated government intervention would be prudent. But FRBM targets do not give space for a very ambitious package. The government has so far allowed itself to deter from the FRBM target by 0.5 percentage points, vary of consequences of fiscal slippages. There is no doubt that relaxing the FRBM targets could unlock a bulkier package to aid the various sectors of the economy but it must be remembered that fiscal stimulus is more like steroids as the former chief economic advisor Arvind Subramanian had highlighted in the Economic Survey on account of the 2011 fiscal stimulus.
Experts will pour in their advice but ultimately it is up to the government to act. Being well-aware of its budgetary commitments, the government will come up with a package that serves the purpose and also does not hurt its commitments to a varying degree. A balance is indeed required and even in such unprecedented times, the government has to find one and move forward. The contraction in the economy has to be borne by all sectors but the government ought to identify the cost-benefit of its helping hand. The pandemic is a challenge for all economies and viable decisions with a thought for the future could turn the crisis into an opportunity as well. All rests on prudent decision-making at the moment.