Economic hysteresis, the Economic Survey 2021 states, must be avoided at all costs. The survey pointed out that the coronavirus pandemic created a significant negative shock to demand. Bankruptcies and job losses might not be fully retrieved, which would create the possibility of an economic hysteresis.
"Covid-19 pandemic has created a significant negative shock to demand. The various costs of financial distress that firms face even before potential bankruptcy combined with possible firm bankruptcies in a choked bankruptcy system, on the one hand, and the possibility that jobs lost during the lockdown may not get fully retrieved, on the other hand, create the possibility of economic hysteresis that must be avoided at all costs," it stated.
Economic hysteresis is an event that continues to persist even after the factors that led to the event are removed or run their course. This usually takes place following extreme or prolonged economic crash or recession. For instance the coronavirus pandemic led to job losses, the rate of which might continue to grow despite growth in the economy or technical end of the economic impact.
The survey states that to eliminate the possibility of growth being impacted in the medium to long run, the government has been extremely proactive. It said that the Centre has launched several seminal reforms, the effect of which would manifest in the medium to long run. "To ensure that the economy remains in good health to avail the full benefit of these significant reforms, the 'economic bridge' to the medium and long-term has to be created. Only an active fiscal policy - one that recognises that the risks from doing too little are much more than the risks from doing too much - can ensure that this 'economic bridge' is well laid out," stated the survey.
"Central to this change in policy stance is the recognition that if we apply the old framework to today's reality, if we fail to stimulate the economy, we risk the temporary weakness in demand leading to lower potential growth. With the IRGD expected to be significantly negative for India in the foreseeable future, pro-cyclical fiscal policies may lead to higher, not lower, debt/GDP ratios," it added.
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