Economic recovery after the epidemic | Photo Credit: Maria Stavreva
In continuation of the earlier piece published on March 7, where we discussed the role of consumption and investment in India’s post-pandemic economic recovery, here we look at the roles that external demand and the fiscal side may have played.
We plot the share of exports in GDP with GDP growth rate chart 1a, indicating that export growth (perhaps as a result of suppressed global demand) contributed to the overall growth of the economy. The level of exports depends on the income of the countries to which India exports. Therefore, being an exogenous factor, they can play a balancing role, especially during domestic recessions, provided the global economy itself is not slowing down. Because if this happens then this boom of exports cannot last in the medium term. chart 1b Shows that fiscal expenditure has also helped, even though the magnitude of its contribution to the revival, which we saw in the first part, was not as significant as other factors.
Charts appear incomplete? Click To remove AMP mode
Let us consider these two variables, starting with the external region. In terms of exports, it is often argued that rupee depreciation helps because Indian goods become cheaper for the rest of the world, while imports become more expensive. In this context, footloose capital outflows as has happened in the recent past (as a result of Fed rate hikes) may not be all that bad as it depreciates our currency. But is it really in the Indian case? chart 2 Shows that the depreciation of the rupee in real terms (called the real effective exchange rate) worsened rather than improved India’s trade balance.
Hence, despite the fall in the real value of the rupee, India lost to competitors (in net). This is not as surprising as it may seem, because as the global economy slows down, so do our exports, even when our goods are cheap. On the other hand, depending on how our economy grows, our imports may continue to increase. In other words, the rupee’s loss in the Indian export-import story is bleak at best. Other studies have found this to be the case even during the heyday of Indian high growth in the 2000s. We should not take rest from the falling rupee.
This brings us to the last, but not the least (especially at this juncture), factor – the fiscal demand. Fiscal policy is as much about redistribution as it is about demand creation. chart 3 shows that fiscal expenditure has been eased by a jump in tax revenue, so both have moved together.
There are two issues here. One, in itself, a regime of tax-financed government expenditure is not a bad idea, provided these taxes do not disproportionately burden the poor and marginalised. Because if they did, it would be like providing an employment guarantee, but it would have to be financed by taxing the same person more. Unfortunately, India has the most regressive tax system (ratio of indirect to direct taxes) among G20 countries. This distorted structure of taxes has to be changed if we are to move forward in addressing both demand and distribution. Two, for this economic revival to be sustainable, one needs flexibility where government spending is not tied to tax revenue because in the event of a reversal of economic fortunes, tax revenue will also go down. In such a situation, an unrestricted fiscal expenditure will come in handy in both the short and medium term to help the economy afloat and weather the storm.
Rohit Azad and Indranil Chowdhary teach economics at JNU and PGDAV College, University of Delhi, respectively
rohit.jnu@gmail.com and chowdhury.indranil@gmail.com
Source: Ministry of Statistics and Program Implementation (MOSPI), RBI, US Federal Reserve
Read this also | Chopped Water: On India’s Post-Covid Recovery
Listen to our data podcast: What decides the age of marriage of women – wealth, education or caste. Data Point Podcast