Government should let Fiscal Deficit rise to 7.5% to boost consumption, investment, says Montek Singh Ahluwalia

Former deputy chairman of the Planning Commission Montek Singh Ahluwalia has suggested five key steps the Centre must take to handle the collapse in private consumption and private investment of this economy.

In a 35-minute interview with Karan Thapar for The Wire, Ahluwalia who is one of India’s most highly regarded economic administrators has suggested five steps to ensure the economy quickly recovers to pre-pandemic levels and its growth accelerates beyond the 4% levels of 2019-20.

While explaining his suggestions, Ahluwalia said the finance minister of should be prepared to let the fiscal deficit rise to levels of around 7.5% given a clear pathway of reforms is simultaneously calculated.

A distinguished fellow at the Centre for Social Economic Progress, Montek Singh Ahluwalia, said the Centre must first provide adequate income support, especially for the poor in order to handle the collapse in private consumption which has regressed to about the same level as in 2017-18. However, the Centre shouldn’t start new schemes but “jack up” existing schemes like MGNREGA, old-age pensions, etc, he said.

The second step suggested by Mr. Ahluwalia is that the Central government must facilitate payments that are held up. Citing a recent announcement by the commerce minister that Rs 50,000 crore owed to exporters would be paid immediately, he said this is “a no-brainer and should have been done a long time ago”.

Ahluwalia gave the third suggestion, saying that public sector corporations must expedite investment activity. Fourth, the Centre must take steps to correct hindrances in the banking system, making sure that lending picks up. Currently, it’s around 6% in nominal terms and nowhere near sufficient, he added.

Fifth, the government must try and make sure that at least 80% of the adult population is administered both doses by the end of the year, he said. However, even if that it’s impossible as most people think, Ahluwalia said, the Centre must set clear and definite vaccination drive targets and strive to achieve them.

Talking about the state of the economy, Montek Ahluwalia said the collapse in private consumption “is clearly not good news, it certainly is a problem. If consumption has fallen so far it’s difficult to believe we can see economic recovery without a very substantial recovery in consumption”, he added.

Quarter 1 results reveal that private consumption is 12% below pre-Covid levels and it is exactly at the same level as it was in th year 2017-18. Considering that private consumption is 56% of GDP and, thus, by far the biggest engine driving the Indian economy, it’s crucial to take steps to correct this collapse.edited 12:02
Ahluwalia talking about the sharp rise in agricultural employment, which grew from 42.5% in 2018-19 to 45.6% in 2019-20, said this was evidently distress employment taken by people who lost better-paying jobs as a way of keeping “body and soul together”. “The growth in agricultural employment is not a positive development at all”, he added.

Ahluwalia, in the interview to The Wire, discusses how most of the increase in employment of agriculture is in terms of unpaid family workers. Of which many are also women, even if not the majority. This sharp increase of women in agricultural employment is another sign of distress and not good news.

Talking about surveys conducted by PEW, including the Azim Premji University that suggest a huge number of people have fallen below the poverty line since the start of the Covid-19 pandemic, Singh said “if 100 million people have fallen below the poverty line it would not surprise me.”

It looks as if “much or all of the good performance of the economy under UPA, when 140 million people were pulled out of poverty, has been reversed,” Ahluwalia said. However, this could be easily fixed if the economy starts growing. He added it doesn’t mean that this 100 million have fallen below the poverty line irreversibly.

(Inputs from The Wire)

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