What's New :
Organize your integrated preparation with Minimum Input & Maximum Output. Register here...

‘Why India needs bold economic reforms?’

  • Category
  • Published
    7th Sep, 2020

Covid-19 economic pain will pass but we need to create enduring change for firms and citizens with reforms.


Covid-19 economic pain will pass but we need to create enduring change for firms and citizens with reforms.

Need to revisit economic reform in India

  • The pandemic created by the outbreak of coronavirus or COVID-19 has shaken the world, which is unparalleled in the modern world. The US, Europe,got into a deep crisis that has threatened life and economy simultaneously and injected unprecedented uncertainty into the psyche of the capitalist economy.
  • India also failed to remain insulated. However, the death toll remains much lower in comparison to the West. Nonetheless, the Indian economy has reached a standstill situation with a complete halt in all types of economic activities. Both supply-side and demand side of the economy became claustrophobic. These have multi-layered short-term and long term ramifications on the lives and livelihoods of Indian people.
  • The projected economic growth has been slashed down by most of the International agencies. World Bank projected a growth rate for India in 2020-21 between 1.5 per cent and 2,8 per cent. IMF and Crisil’s projection stand at 1.8 per cent and 1.9 per cent, respectively. It is estimated that the fiscal deficit may be closer to 9 per cent of GDP in 2021.
  • Unemployment is likely to reach a historically highest level in the post-independence period. According to CMIE data (CMIE, 2020), the unemployment rate has reached at 23.60 per cent, and for the urban area, the rate stands at 25.30 per cent, and for rural India, the rate is 22.80 per cent on 28th April 2020.
  • The emerging scenario has exposed the glaring reality of India’s informal sector, which does not receive much attention before the outbreak of a pandemic. Besides, the pathetic plight of daily wage-earners, migrant labourers that have been unfolded during the lockdown period, raised few fundamental questions on efficacy and outcome of economic reforms in India and on the theoretical underpinning of the philosophy of neo-liberal economy.

Government Economic Measures during Pandemic

Monetary Measures

  • In March 2020, Reserve Bank of India (RBI) announced its bi-monthly monetary policy statement, 2019-20 resolution of the monetary policy committee (MPC) to infuse liquidity in the economy through banking and non-banking financial institutions.
  • Repo rate has been reduced by 75 basis point and brought down to 4.4 per cent, and the reverse repo rate has been cut down by 90 points and brought to 4 per cent. This rate cut intervention by RBI has come after central banks across the world announced rate cuts to stave off a coronavirus related recession. Cash Reserve Ratio (CRR) has also been reduced by 100 basis points (1 per cent) and stands at 3 per cent.
  • A special refinancing facility of 500 billion to institutions such as National Bank for Agriculture and Rural Development (NABARD), the Small Scale Bank of India (SIDBI) and the National Housing Bank (NHB) has been announced.
  • These institutions play an essential role to meet up the long-term funding requirements of agriculture and the rural sector, small industries, housing finance companies, Non-banking Financial Companies and Microfinance Institutions (RBI Press Release, 17th April 2020).

Fiscal Policy Response

  • Immediately after the lockdown, Finance Minister announced a fiscal package of Rs. 1.7 lakh crore, which is closer to 1% per cent of GDP to ensure food and cash for the poor and vulnerable section of the society .
  • It has been announced that under the Pradhan Mantri Garib Kalyan Anna Yojana Food Scheme), everyone within this scheme receives 5kg of wheat/rice in addition to the current 5 kg allocation for coming three months for free. 1kg of a preferred pulse (basedon regional preference) will be given for free to each household will also be provided through Public Distribution Scheme.
  • 23 crore of families who are having ration cards or roughly 82 crore population or two-third of the population is supposed to be benefitted. Under PM-KISAN scheme (minimum income support scheme), farmers currently receive Rs. 6000 every year in three equal instalments.
  • Under Jhan Dhan Scheme, 200 million woman account holders shall be provided ex-gratia amount of Rs. 500 per month for the next three months. Women in 83 million families below the poverty line covered under Ujwala scheme get free LPG cylinders for three months.
  • Government is also providing collateral-free loans amounting Rs. 200,000 for 630,000 Self-Help Groups (SHGs), which is likely to help 70 million households. It is further stated that the District Mineral Fund tuned Rs, 310 billion shall be used for the people who are facing economic disruption due to lockdown.

The Policy Impact

  • Considering both monetary and fiscal measures, few pertinent questions are to be raised. From the monetary policy perspectives, the general observations say that it will temporarily reduce the volatility in the share market. Borrowers will feel relieved because there shall be interest cut on loan taken by industries, big, medium and small.
  • Housing loan shall be cheaper and those who are paying Equated Monthly Installments (EMI), their interest payment will be reduced and which will be resulted in lower EMI payment. Credit requirements for the agricultural sector will be eased out.
  • Moratorium on loan repayments and interest payments will help the small borrowers from the transport sector, especially who run SUVs, Auto-rickshaw, Battery driven Rickshaw and even a rickshaw.


  • India will continue to remain least prepared to fight the pandemic because of feeble public health structure. As per World Bank data, The hospital bed availability is 0.55 per thousand population in 2019, which was 0.718 in 1980.
  • Physician per thousand population stands at 0.739 in 2011 in comparison to 0.27 in 1981.Community health workers per 1000 population stood at 0.504 in 2011 and which was 0.627 in 2003. The figure for nurses and midwives was 0.9 in 2011, which 0.787 in 1991.
  • In overall human Development performance, in 2019, India achieved a human development score of 0.647 and ranked 129th among 189 countries which are falling medium Human Development Category of Countries.
  • On the contrary country like Sri Lanka made considerable progress and ranked 71 with an HDI value of 0.708 and is falling under high Human Development Category of countries and also outperformed the rest of the SAARC countries, including China.

Employment and Unemployment

  • The unemployment rate has already touched at 23 per cent. The average economic growth rate during the entire reform period remain closer to 6 per cent. Now growth –employment relationship itself get into serious doubt.
  • In 2019-20 Budget, Agriculture and Rural Development together find an allocation closer to 11 per cent of GDP together, but numerous schemes for these two sectors failed to improve the rural economy. The situation is such that around 43 per cent of the agricultural community is sharing only 14 per cent of income.
  • The rise in rural distress has increased the supply of labour force in the urban informal sector and increased the percentage of migrant labourers. In brief, Economic reforms and expansion of the informal sector went hand in hand.
  • Informal workers do not have any written contract, paid leave, health benefits or social security. Closer to 90 per cent of the workforce are engaged in informal sectors.
  • Therefore, lockdown situation and concomitant severe economic recession have created a scenario where both life and livelihoods of 90 per cent of the workforce and their survival are at stake.

Fall in Consumption Expenditure

  • In spite of having a plethora of schemes for rural India, it has become gradually clear that the economic condition of rural India has started deteriorating much before the outbreak of COVID-19 pandemic.
  • As per the “Key Indicators: Household Consumer Expenditure in India” conducted by the NSO, the average monthly spending by an individual has been reduced to Rs. 1446 in 2017-18 from Rs. 1501 in 2011-12. This implies that there is an overall decline in per-capita consumption expenditure by 3.7 per cent. But the worrying factor is that in rural India, consumption expenditure has been reduced by 8.8 per cent and for urban India by 2 per cent.
  • The crucial issue is that Rural India’s monthly spending on food has declined by 10 per cent between 2011-12 and 2017-18. Rural India spent Rs. 643 per month on food items and in 2017-18, the spending has been reduced Rs. 580. The figures are inflation-adjusted, and hence the decline is in real terms.
  • During the lockdown period and in post lockdown period, disruption in supply chain prices of vegetables and other food items has already been increasing. Lockdown and halt in economic activities are going to throw minimum employment and income opportunities for both rural people as well as people associated withthe large urban informal sector. The spread of hunger and impoverishment has become imminent.

Income Inequality

  • Almost three decades passed away since India initiated economic reforms in 1991. The country many times have tagged as a fastest-growing country or second fastest growing country after China. The average growth rate during this entire period is closer to 6 per cent. The moot point is that does growth bring equity or increase income inequality.
  • The famous research paper of two well-known economists Lucas Chancel and Thomas Piketty (Chancel & Piketty, 2017) highlighted that India’s income inequality reached at the highest level since the income tax was introduced in 1922. The study further revealed that between 1951 and 1980, the gap between rich and poor was narrowing, but the trend was reversed during 1980-2014. The Gini coefficient is estimated to be close to 0.50, which would be an all-time high. A general rise in the Gini coefficient indicates that government policies are not inclusive and may be benefiting the rich as much as (or even more than) the poor.
  • The survey conducted by Oxfam India in 2018 suggests the rising inequality in India in the recent past. The report stated ‘73 percent of the wealth generated last year went to the wealthiest one percent

Way forward:

  • How to strike a balance between lives and livelihoods is possibly the primary concern before the country at this crucial juncture of COVID-19 pandemic. The short-term solution lies to keep the demand side alive so that the supply side of the economy shall have a breathing space in future. Therefore, the focus should be on people associated with the informal sector of the economy, including agriculture. Cash and kind transfer are one of the options.
  • There is a need to reorient the food items distributed through PDS. Addition of egg, soybean, mustard oil, salt, Potato, onion and milk will keep the nutritional level intact and save the millions of vulnerable people from fighting hunger and starvation.
  • The budgetary allocation under MGNREGA, Rural and Urban Livelihood Mission, Mid-Day Meal, Swarnajayanti Gram Swarozgar Yojona, Pradhan Manti Kishan Pension Yojona, Atal Pension Yojona can be clubbed to ensure the cash and kind transfer till the normal economic activities are taking off.
  • India’s debt-GDP ratio stands at 69.04 per cent (Union Budget 2020-21). Given the fact that revenue collection will be much lower as anticipated, India must relax its fiscal deficit to remain contained within 3.5-4.5 per cent, and at least 5-6 per cent of GDP should be spent to support the families associated to the informal sector.

Verifying, please be patient.

Enquire Now