Economic Survey: Policy-makers saw Covid disruption as supply side problem

Survey says incorrect to view pandemic-led disruption as merely a demand shock, defends supply side measures put in action by govt as a policy response to the pandemic.

Why did the government of India choose supply side reforms over measures to boost demand into the pandemic? To provide flexibility and resilience to the Indian economy, says the Survey

Saying that it is incorrect to view the pandemic-led disruption as merely a demand shock, the Economic Survey of 2021-22 strongly defended the supply side measures put in action by the Government of India as a policy response to the pandemic.

“A distinguishing feature of India’s response has been an emphasis on supply-side reforms rather than a total reliance on demand management. The government aggressively implemented supply-side measures to prepare the economy for a sustained long-term expansion,” the Survey noted.

The Survey mentioned two major themes in the supply-side reforms strategy of India, flexibility and resilience. Inducing flexibility and innovation to deal with long term unpredictability of the post-Covid world involved deregulation, process reforms, privatisation, production-linked incentives and so on. Building resilience consisted of augmenting social infrastructure like housing, water, cooking gas and toilets, and the policy of Atma Nirbhar Bharat.

“The post-Covid world will be impacted by a wide variety of factors – changes in technology, consumer behaviour, geo-politics, climate change and so on. Therefore, the post-Covid economy will not be merely a re-inflation of the pre-Covid economy. Simply building it back with demand measures is not a solution,” the Eco Survey said.

The central government came up with a range of response measures to tackle the pandemic disruption. In the initial months, they included giving food to those who temporarily lost incomes, providing financial assistance to the smallest of the Indian firms (MSMEs)—quick measures to alleviate current issues.

They were followed up with long term supply-side measures like production linked incentives, asset monetisation, liberalised FDI norms and public procurement policy.

Explaining the policy, the Eco Survey used the advanced “Agile” approach to deal with the crisis, which involved continuous monitoring of 80 high frequency indicators, and responding iteratively based on changes in each one of them (Bayesian-updating of information). This made the policy response flexible in an environment of extreme uncertainty, the annual survey said.

It also mentioned that this was a better strategy than one which rigidly pre-commits a certain policy response, which has been the case with most advanced economies.

The Survey also said that apart from deregulation, which has been India’s policy for a long time, the government also focused on process reforms in the last two years.

“While deregulation relates to reducing or removing the role of government…the latter relates to simplification and smoothening of the process for activities where the government’s presence as a facilitator or regulator is necessary,” it noted.

“Sharp increase” in capital spending that spurs demand as well as supply, and fast vaccination will support the supply side measures to bring back growth momentum to the economy, it said.