Hour of reckoning: An economic revival package has to be led by public investment

The first clear idea of the economic damage caused by the pandemic will be available end-August when the GDP data for April-June quarter is announced. The forecasts are grim. In this backdrop, the RBI released its 2019-20 annual report this week. The highlight is that the central bank believes the damage is severe. It will not be offset by conventional tools such as tweaking interest rates or calibrating tax slabs. It requires government to be at the forefront of the recovery effort.

The government needs to take the baton from RBI and use its fiscal tools to trigger near-term economic activity. But this has to be designed to feed into long-term structural reforms that will make India’s economy a more dynamic one. This calls for a coherent approach. The start of the effort cannot be put off till enough people are vaccinated or herd immunity is in sight. The longer the government delays a revival package, the more lasting will be the damage. The next revival package should change tack. It needs to be led by government spending to overcome the challenge of extreme risk aversion among firms and financial intermediaries.

Public investment in infrastructure can address two issues. It can crowd in private investment as firms win contracts. In addition, it can remove a cause for Indian firms’ poor competitiveness. One way to raise resources for this investment is to wholeheartedly embrace privatisation. This effort must be shielded from politicisation which crippled earlier attempts. Moreover, structural reforms also need major political parties to accept the general direction we need to take. A good place to start building consensus is the GST Council, a unique federal structure. The government should resolve the compensation issue quickly. This would act as a force multiplier for subsequent reforms.

This piece appeared as an editorial opinion in the print edition of The Times of India.