SINGAPORE — India needs to restore purchasing power in rural and urban areas for growth to pick up again, an economist said Monday.
To do that, New Delhi has to revive jobs that were lost due to the pandemic through both an existing rural employment guarantee scheme and by introducing a similar program in urban areas where work has dried up, Arun Kumar, an expert on India’s informal economy, told CNBC’s “Street Signs Asia.”
“What the government should do really is that the large number of people who’ve lost work, it needs to revive that,” he said
“So therefore it needs to pump in purchasing power into the rural areas, through the rural employment guarantee scheme, and start an urban guarantee scheme because a lot of people who are returning to urban areas are also not finding work,” he said, adding that the services sector is not carrying the same amount of economic weight as before the pandemic.
“Unless the demand is put into the economy, (growth is) not going to really pick up even if you allow industries to reopen,” he said. Kumar also explained that consumer confidence is likely to remain low due to lingering uncertainty as the festive season approaches.
During festive seasons, Indians typically gather in large crowds at places of worships and at shopping malls, especially during Christmas. India now has reported more than 7.1 million cases of coronavirus and over 109,000 people have died. While the number of daily reported cases have recently declined from September highs, there are worries that the figure could jump during the festive period.
The unemployment rate in India was about 6.7% in September, down from the April high of 23.5%, according to data from Centre for Monitoring Indian Economy.
Green shoots emerging
For the three months from April to June — considered the first quarter of India’s current fiscal year — the economy shrank at its steepest pace of 23.9% as the country was mostly locked down to slow the spread of coronavirus. Private consumption and investment demand collapsed as most nonessential activities were barred during the national lockdown, leading to job and income losses as well as uncertainty that curtailed spending.
Kumar said the official figure did not include many data points, especially those collected from India’s vast unorganized sector that deals almost exclusively in cash transactions. He explained that by his own estimates, India’s growth likely shrank closer to 40% because of the impact on the unorganized sector.
“Their incomes have gone down and because capacity utilization has been low, and consumer confidence is low, therefore investment is down very badly in the economy,” Kumar said.
India’s central bank last week predicted that the economy is expected to decline by 9.5% with downside risks. Governor Shaktikanta Das said that modest recovery in various high-frequency indicators seen last month could strengthen further in the last six months of the fiscal year that ends in March 2021 with “progressive unlocking of economic activity.”
Though Das’ forward-looking outlook implied that the economy is already past the worst of the crisis, economists say that India still needs policy accommodation to nurture the early signs of recovery. But they also point out the government has very little spending room to spur growth as India’s fiscal position continues to deteriorate with weak revenue growth.
India’s chief economic advisor previously said the government will not rule out short-term fiscal stimulus but New Delhi has yet to announce it.