Context

• To revive the economy from the COVID-19 induced current slowdown, it is imperative that confidence must be injected back in the entire ecosystem.

Consequences of economic contraction

• The slowdown in economic activity is both a function of external factors such as the lockdown and behavioural changes of people and enterprises, driven by fear. 
• However, economic contraction is not merely a GDP number but reversal of many years of progress. 
• A significant number among the weaker sections of our society may slip back into poverty.
• Many enterprises may shut down. 
• An entire generation may be lost due to severe unemployment. 
• A contracting economy can adversely impact our ability to feed and educate our children owing to a shortage of financial resources. 
• The deleterious impact of an economic contraction is long and deep, especially on the poor.

Injecting confidence- needed the most

• The foundation for reviving our economy is to inject confidence back in the entire ecosystem. 
• People must feel confident about their lives and livelihoods. 
• Entrepreneurs must feel confident of reopening and making investments. 
• Bankers must feel confident about providing capital. 
• Multilateral organisations must feel confident enough to provide funding to India. 
• Sovereign ratings agencies must feel confident about India’s ability to fulfil its financial obligations and restore economic growth.

Ways to boost confidence

On NREGA and cash support

• The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme has proved to be a bedrock of support in normal times but it is not enough during difficult times like COVID-19.
• So along with expansion of MGNREGA programme, a meaningful cash transfer can restore confidence in these families. 
• Money in the hands of people can provide an immediate sense of security and confidence, which is the cornerstone to restoring economic normalcy. 

Look at the financial system

• There is also a dire need to restore confidence in the financial system which acts as the vital lubricant for the economy. 
• COVID-19 assistance measures undertaken by the RBI and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps, but they have largely failed since banks are not confident of lending. 
• Reviving the health of the banking sector is not merely about capital infusion or disinvestment of public sector banks. 
• Allowing institutions such as the RBI, public sector banks, bankruptcy boards, securities and insurance regulators to function freely and professionally is the foundational step to restoring confidence in the financial system. 
• If there is confidence among people to spend and among bankers to lend, then the private sector will spontaneously derive the confidence to reopen and invest. 
• When firms feel confident of availability of capital and consumers, they kick-start production and investment. 

Government needs to borrow

• A large direct cash assistance to people, improving capital adequacy of banks and providing credit guarantee schemes for corporates require significant financial resources. 
• India must make full use of loan programmes of international institutions such as the International Monetary Fund and the World Bank. 
• Our long track record as an impeccable borrower with no default, timely repayments and full transparency make us an ideal borrower for these institutions. 
• India going back to the old ways of deficit monetisation by the RBI, also known as printing money should be adopted as a last resort when all other options are exhausted.

Setting things right

• It is important to enlarge one’s diagnosis of India’s economic woes from mere GDP numbers to the underlying sentiments of fear, uncertainty and insecurity prevalent in people, firms and institutions. 
• Restoring confidence in people through direct cash assistance and other welfare programmes can help them live their lives and spend. 
• Restoring confidence among bankers through autonomy of institutions and processes will help them lend. 
• Restoring confidence among businesses with greater access to capital will help them invest and create jobs. 
• Restoring confidence among international organisations by re-establishing the credibility of our institutions will help get funding assistance and objective sovereign ratings.

Conclusion

• Thus the path to India’s sustained economic revival is through the philosophical pursuits of improving the confidence and sentiments of all in our society, using the economic tools of fiscal and monetary policies.

Reference:

1. https://www.thehindu.com/opinion/lead/rebuild-indias-confidence-revive-the-economy/article32255125.ece