Post Covid-19,Revival of Economy:
An Economist View
According to KPMG,
the lockdown in India will have a sizeable impact on the economy mainly on
consumption which is the biggest component of GDP.
Congress MP Rahul
Gandhi held the second installment of his lecture series with Nobel laureate
Abhijit Banerjee on the economic fallout of the Covid-19 outbreak in the
country. The earlier edition was with former RBI governor Raghuram Rajan. In
the interaction Banerjee said
"to address
the crisis, as money needed to be put in the hands of the people to revive
demand. In fact, Banerjee was of the opinion that cash transfers should
go beyond the poorest of the poor and follow the examples of the US and Japan,
which have been making direct cash transfers to all residents or a very large
section of their populations."
Due to weak domestic
consumption and consumer sentiment, there can be a delay in investment which
further add pressure on the growth.
"And there is urgent need to mobilize resources to stimulate the economy for increased demand and employment". In India, those with savings and access to shelter and food have managed to weather the storm even though, with difficulty.
"And there is urgent need to mobilize resources to stimulate the economy for increased demand and employment". In India, those with savings and access to shelter and food have managed to weather the storm even though, with difficulty.
However, the impact on a large
proportion of the 40 million migrant labourers, those who provide the muscle to
power India's construction, agriculture and other sectors, has been very
disturbing.
The Micro, Small and Medium
Enterprises (MSMEs) sector, which contributes to 30% of India's GDP, is
one of the key drivers of the Indian economy.Today, almost all MSMEs are out of action due to the
lockdown, they are unable to pay their employees and several don't have the
financial resources to re-start their businesses.
The Keynes prescription for
the Great Depression of 1929 that aggregate demand—(total household,
businesses and government spending) --is the most important driving force of an
economy, holds true even now.
The Great Depression inspired Keynes to think differently about
the nature of the economy. Keynes rejected the idea that the economy would
return to a natural state of equilibrium by itself. Instead, he argued that
once an economic downturn sets in, for whatever reason, the fear and gloom that
it engenders among businesses and investors will tend to become self-fulfilling
and can lead to a sustained period of depressed economic activity and
unemployment.
In
response to this, Keynes advocated a countercyclical fiscal policy in which,
during periods of economic woe, the government should undertake deficit spending to make up for the decline in investment and
boost consumer spending in order to stabilize aggregate demand.Keynes also criticized the idea of excessive saving. He saw it
as dangerous for the economy because the more money sitting stagnant, the less
money in the economy stimulating growth. This was another of Keynes's theories
geared toward preventing deep economic depressions.
The multiplier effect is one of the chief components of Keynesian
counter cyclical fiscal policy. According to Keynes's theory of fiscal stimulus,
an injection of government spending eventually leads to added business activity
and even more spending. This theory proposes that spending boosts aggregate
output and generates more income. If workers are willing to spend their extra
income, the resulting growth in the Gross Domestic product (GDP) could be even greater than the initial stimulus
amount.
The
magnitude of the Keynesian multiplier is directly related to the marginal
propensity to consume. Its concept is simple. Spending from one consumer
becomes income for a business that then spends on equipment, worker wages,
energy, materials, purchased services, taxes and investor returns. That
worker's income can then be spent and the cycle continues. Keynes and his
followers believed individuals should save less and spend more, raising
their Marginal propensity to consume to
effect full employment and economic growth.
Keynesian economics focuses on demand-side solutions to recessionary periods. The intervention of government in economic processes is an important part of the Keynesian arsenal for battling unemployment,underemployment, and low economic demand.
Lowering interest rates is one way governments can meaningfully
intervene in economic systems, thereby generating active economic demand.
Keeping
interest rates low is an attempt to stimulate the economic cycle by encouraging
businesses and individuals to borrow more money. When borrowing is encouraged,
businesses and individuals often increase their spending. This new spending
stimulates the economy..
