Government must pump fiscal support for domestic demand

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  Government must pump fiscal support for domestic demand

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  • The story: The nation's society and economy is hit by the second Covid wave badly. Fiscal measures such as direct cash transfers, enhanced allocation under rural job guarantee scheme, free foodgrain distribution, modest cuts in excise duty on fuels, and expedited vaccination are now crucial to overcome the second wave of Covid-19. It's a political decision with significant ramifications.
  • What to do: A targeting spending is now needed, also for contact-based services that have borne the brunt of the pandemic since 2020. It is crucial to support rural and urban demand because the economic impact of the pandemic this time will be more on demand impulse than on supply-side disruptions amid an intensification of infections in rural areas.
    1. Targeted spending through cash transfers can be done to support both rural areas and the urban poor. Direct spending, or through employers, would have to be given, considering whatever the fiscal space allows. Of course, there is caution needed in direct cash transfers as distribution problems exist.
    2. The space for a fiscal stimulus is likely to be limited, making effective targeting crucial. Things like the RBI's huge transfer may help.
  • Demand push: Demand in rural and urban areas may need to be supported given the expected prolonged impact of the second surge on sentiment. So, a combination of free foodgrain and cash transfers, higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Act, and cuts in excise duty on fuels are needed. The MGNREGA allocation will need to be enhanced from FY22 budget estimate of Rs 0.7 trillion, given concerns regarding the rural economy. That's what happened in last fiscal too.
  • Monsoon impact: Impact of second wave on the economy will be felt more through the loss of demand impulse than supply-side disruptions. The loss of demand-side impulse is expected to be more pronounced in rural areas than in urban areas, notwithstanding the Indian Meteorological Department's forecast of a near normal monsoon in 2021. 
  • Vaccination drive: Govt. needs to strengthen focus on the vaccination drive. And while that happens, providing free rations, income support, higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme would go a long way in reducing the injury. Even higher allocation to farmers under the PM-KISAN scheme may be done. The call for targeted spending comes as the US too has given fiscal stimulus through one-time direct cash payment, expansion of unemployment benefits to include gig workers, and grants to hospitals and health care providers.
  • Capex: In April 2021, India eased the rules for capital expenditure by its ministries to try to boost spending in the economy and also announced the allocation of 5 kg of free food to the poor every month. But as fiscal room is limited for the government despite the Rs.99,122 crore dividend it received from the Reserve Bank of India, nothing much is coming forth. India aims to reduce its FY22 fiscal deficit to 6.8% of the gross domestic product from an estimated 9.5% last year.
  • Summary: While the nature of the second wave of the virus is different from the first one when the rural economy was insulated, the situation is difficult as large cash transfers would require fiscal leeway and the government is not comfortable with that.
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PT's IAS Academy: Government must pump fiscal support for domestic demand
Government must pump fiscal support for domestic demand
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