India’s vaccination programme can be the biggest financial stimulus

A near-universal vaccination programme funded by a Covid bond issue could remove fear from the minds of consumers and encourage them to start spending on travel, eating out and other goods and services. The RBI will have to print additional money to buy the bonds and this could be fiscal stimulus that will help set the Indian economy back on track.

When Indian Finance Minister Nirmala Sitharaman rises to present her third Budget on February 1, she is expected to unveil a stimulus package to spur consumption that will provide ballast to the country’s growth engine that is showing signs of picking up.

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But more than any financial package handed out by the government, a concerted effort to remove the fear in the minds of consumers will go a long way in improving consumer sentiment. That’s where the unveiling of two vaccines and the rollout of the world’s largest vaccination programme by the Narendra Modi government can complement any fiscal measures the Finance Minister may announce.

Thus, the vaccination programme can emerge as the biggest financial stimulus. By removing the fear that is currently holding back consumer spending, the inoculation drive can spur spending and provide a massive boost to the country’s services sector, which accounts for more than 50 per cent of India’s GDP.

Services sector in the doldrums

The agriculture sector is booming, the farmers’ agitation notwithstanding. Manufacturing is picking up. That’s good news for India’s economic planners. But the services industry – comprising restaurants, malls, hotels, airlines, taxi services, saloons, neighbourhood tailoring shops, street vendors, etc. – a significant part of it in the unorganised sector, accounting for more than half the country’s economy, is reeling from the after-effects of the Covid-19 pandemic.

This sector employs millions of people, whose consumption of daily necessities and other goods and services keep the wheels of the economy whirring. Unless the government is able to remove the fear of infection that is stalking society today, this important engine of growth will continue to sputter, making it difficult to sustain high growth rates once the current economic uptrend, a which many economists attribute to pent-up demand, is satiated.

Travel and tourism sector losses at 2 per cent of GDP

A recent study by leading chamber of commerce, the Confederation of Indian Industry (CII) and hospitality industry consultancy Hotelivate has estimated that the Indian travel and tourism industry, along with those that have forward and backward linkages with it, could lose as much as $65.57 billion. That’s more than 2 per cent of the Indian economy.

Compounding the miserable scenario is the finding that about 55 per cent of this loss will be borne by the unorganised sector, where stakeholders such as employees and others have no safety nets and relatively lower levels of savings.

“The coronavirus pandemic has given a crippling blow to the Indian travel and tourism industry…The entire value chain linked to travel & tourism is likely to lose…

This is the one of the worst crises ever to hit the industry, impacting all its geographical segments – inbound, outbound and domestic, almost all tourism verticals – leisure , adventure, heritage, MICE, cruise, corporate and niche segments,” the report said.

$9-billion contraction in food/beverages sector

An allied sector, the food and beverages industry, has also been badly hit. The website of India Brand Equity Foundation (IBEF), a trust established by the Department of Commerce, Ministry of Commerce & Industry, Government of India, to promote Indian business interests globally, adds: “The food and beverages industry accounts for 3 per cent of India’s GDP and is the single largest employer in the country, with more than 7.3 million workforce. The nationwide lockdown set this industry on a downward spiral with some predictions suggesting that nearly a quarter of all restaurants may shut down… India’s $50 billion restaurant industry is set to lose an $9 billion in 2020 according to the National Restaurant Association of India (NRAI).”

These are just two sub-sets of India’s humungous services sector but the picture is pretty much the same across the board.

Massive job losses across sectors

Then, the Centre for Monitoring Indian Economy (CMIE) has estimated that about 19 million salaried individuals employed in the formal sector have lost their jobs during and after the lockdown. The International Labour Organisation (ILO) and the Asian Development Bank (ADB) estimates that more than four million Indians below the age of 30 have lost their jobs due to the pandemic.

These are socio-economic segments that spend heavily on various goods and services. It is imperative that employment opportunities are created for these and other people to set the economy back on track.

And for that, the government has to remove the fear that is locking up consumption demand in important segments of the economy. A near-universal vaccination programme financed mainly by the government can, thus, be as much a financial stimulus as a medical palliative. It is, thus, sine qua non for India’s economic future.

Covid bond as fiscal stimulus

But this will require additional money. Raising taxes will squeeze demand. Noted economist and Consulting Editor of The Economic Times Swaminathan A Aiyar has proposed that the Reserve Bank of India print additional money and subscribe to a special Covid bond issue by the government.

Not only will this help address the medical needs of a fearful society, but it will also provide the necessary fiscal boost to sustain the higher growth trajectory witnessed in recent months. And by removing fear from the minds of people, it will encourage them to loosen their purse strings once again.

And this spending surge can prove to be the biggest fiscal stimulus for the Indian economy.