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Home / India News / Lack of stimulus has hurt economy: Amit Mitra

Lack of stimulus has hurt economy: Amit Mitra

India’s GDP contracted by a record 23.9% in the quarter ended June 2020, which makes it the worst performer among major global economies.

india Updated: Sep 08, 2020 03:14 IST
HT Correspondent
HT Correspondent
Hindustan Times
West Bengal Finance and Industry Minister Amit Mitra.
West Bengal Finance and Industry Minister Amit Mitra.(PTI)

New Delhi: India’s economy contracted sharply by 24% in the first quarter of the current financial year because the Union government did not infuse the required stimulus to tide over the devastating impact of a 68-day hard lockdown on the economy that was imposed to check the spread of coronavirus (Covid-19) pandemic, West Bengal finance minister Amit Mitra said.

“Centre rudderless & clueless. Why did India’s GDP [gross domestic product] shrink the most in the world? GoI spent ONLY 1 lakh crores more in April-July 2020, compared to 2019-20, while headlines scream 20 lakh crore stimulus! Negligible additional stimulus meant 11 lakh cr of GDP lost forever. 24% shrink,” he said in a tweet on Monday.

His reference is to the incremental spending by the government in the first four months of this financial year compared to a year ago -- Rs 1.06 lakh crore.

India’s GDP contracted by a record 23.9% in the quarter ended June 2020, which makes it the worst performer among major global economies.

Mitra said the sharp fall in GDP is mainly because of the wrong policy focus of the Union government. “Instead of focusing on demand generation, the [Union] government’s focus is on the supply side. This is not the right time to apply Say’s law,” he said.

“Application of Say’s law – that supply creates demand – is on the condition that all other things are normal. This theory doesn’t work in an unusual situation like this,” he added.

Mitra said the Union government should have spent money to create demand, but its Rs 20 lakh crore stimulus package that was dubbed as a 10% of the GDP, leans more towards loans than direct fiscal stimulus. “The direct fiscal stimulus, which could have generated demand, is less than 2%, and out of that most of the expenditure is routine revenue expenditure.”

“Factories are closed, MSMEs (micro, small and medium enterprises) are in bad shape due to the lockdown. They are not in a position to take loan and start production when demand is subdued. The need is to provide direct fiscal stimulus to create demand, which will attract private investments in the second round,” he said.

The Union finance ministry did not respond to HT’s queries on this matter.

Earlier, chief economic adviser (CEA) Krishnamurthy Subramanian explained the fall in GDP as “an exogenous shock” that was felt globally. “Just to give the comparison, United Kingdom (UK), where the lockdown was less stringent than India, if you use the Oxford University’s index, India’s lockdown was 15% more intense than that of the United Kingdom. I’m using United Kingdom’s [example] because, it’s a country that is of a similar economic size. The contraction there was 22%,” he said.

“But what is important is that India is experiencing a V-shaped recovery after unlocks has been announced. For instance core sector growth, which had declined 30% in April, those declines have progressively reduced to 22% in May 13% in June and 9.6% in July,” he added.

Boston Consulting Group (BCG), in its latest report, BCG India Economic Monitor, pointed to signs of recovery in industrial activity and a rise in power and fuel consumption. While year-on-year (YoY) gap in power consumption narrowed to 4% in July 2020 compared to 10% in June 2020, that in fuel consumption narrowed from 8% in June 2020 to 3% in July 2020.

Nomura, however, said India’s GDP growth fell lower-than-expected because of a collapse in domestic demand due to one of the most stringent lockdowns. “In our view, the current weak economic conditions requires a more aggressive fiscal response, but budgeted fiscal support has been limited, while monetary policy is hamstrung due to inflation,” the report said.

“We also expect a second round of targeted fiscal support in coming months, although it remains unclear if the government will provide a large scale demand stimulus,” it added.

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