Economy & Policy
As we enter the
third quarter of Fiscal 2021, the economic impact of over seven months of
lockdowns is unfolding. We are beginning to see that different segments of the
economy have been impacted in varying intensities and there is no single
recovery curve that can be envisaged.
The IMF, in its World
Economic Outlook – October 2020, has predicted a deep global recession for the year.
While it estimated that the world economy will contract by 4.4%, it suggested
that India’s GDP would contract by 10.3% in FY2020-21, owing to the lockdowns
imposed to combat the coronavirus pandemic. In fact, the economy has already shrunk
by 23.9% in the first quarter of 2020-21, marking the steepest contraction on record.
shoots of revival
the good news is that some green shoots of revival are already visible. The
Finance minister has assured that with unlock, the Indian economy has started
showing signs of revival, which will be steady and sustainable. Further, with
the festival season approaching, the economy can be expected to display a
faster pick-up. By next year, she expects India to regain its position as one
of the fastest growing economies of the world.
Manufacturing Purchasing Manager`s Index (PMI) reached its highest mark since
January 2012, supported by accelerated increases in new orders and production. Further,
after six months of continuous
fall, India`s goods exports have posted a 5.27% YoY growth
in September 2020, with some crucial sectors, such as readymade
garments, engineering goods, petroleum products, pharmaceuticals and carpets on
an upswing. Most importantly, data on the primary sector, agricultural sector
and rural segments reflect strength. The demand for durable goods, agriculture
equipment, tractors and vehicles are all increasing.
Even the IMF
appears optimistic about India’s recovery, forecasting that it will grow at
8.8% in FY2021-22, faster than China, which is projected to grow at 8.2%. It
cautioned, however, that this would be possible if the government ramps up its
efforts in various fields.
of the IMF suggested that there is a need for India to tilt the composition of
fiscal support more towards direct spending and tax relief measures, while
relying less on liquidity support measures and credit guarantees, although
these are clearly important to support the provision of credit in the economy.
packages this far
defended its move to impose lockdowns by explaining that it has put lives
before livelihoods and the lockdowns gave the nation a chance to prepare and
brace itself against the battle against the pandemic.
intent to provide a safety net, during the lockdowns, the government and the
RBI announced a series of stimulus measures targeted at various vulnerable
sections of the economy, specifically farmers, migrant workers, the poor, women
and the disabled, among other steps. These packages comprised cash, food,
credit and credit-guarantees and compliance leniency, in the form of extension
of tax deadlines, etc.
there were policy reforms announced, which would play out over the near future.
Yet none of these measures could really be considered as aimed at reviving
demand; at best, they provided a safety net to the most vulnerable sections of
In mid- October,
for the first time since the economic crisis began, the government announced a
stimulus package worth ₹46,675 crore that was aimed at boosting demand. It
encourages government employees to spend, through leave travel concession
vouchers and pre-paid special festival advances; it also prompts capital
investment by states via 50-year interest-free loans from the Centre and
capital spending on infrastructure projects by the Centre in 2020-21. The
Finance Minister estimated that all these measures are likely to create
additional demand to the extent of around USD 10 billion.
to step on the accelerator
rationale behind the government’s approach, the principal economic advisor
recounted that the government did not see sense in boosting demand (which may
be akin to stepping on the accelerator) while the economy was put in lockdown (which
could be seen as stepping on the brakes). He explained that during the
lockdowns, the government was focused on providing a safety net to the most
vulnerable sections of society.
sees this crisis as a disruptive force that will transform the way economies
function. There are likely to be many changes in the use of technology, supply
chains, manufacturing bases, logistics, healthcare and education delivery, etc.
Given these moving parts, what emerges on the other side of the crisis is
has also consciously focused on implementing structural reform on the supply
side, which included liberalization of agriculture, reforming labour and
financial markets, etc., to build flexibility and resilience in various sectors.
These changes could help the economy survive in the new normal and take
advantage of opportunities that will emerge.
assured that now that the government is taking its foot off the brakes (by unlocking
the economy), it has begun to step on the accelerator by announcing measures to
boost demand in the form of the mid- October ₹46,675 crore stimulus package.
While the direct
consumption expenditure from this package and others like it could give the
economy a shot in the arm, which could result in some quick economic relief, spending
on infrastructure will ensure a more sustainable recovery as it would entail
creation of assets.
In fact, fiscal
spending on infrastructure will kill two birds with one stone as it will prepare
the economy to take advantage of opportunities that emerge while it boosts
demand through the employment and multiplier effect of the spends.
up for lost time
government officials have repeatedly assured that there is scope for further
fiscal and monetary measures, on a need basis. At this juncture, for India to
pull itself out of the economic quagmire in which it has fallen, as a result of
the lockdowns necessitated by the pandemic, it will take concerted fiscal efforts.
Nevertheless, these efforts, if timely and adequate, will deliver rich
dividends in the form of catapulting India onto a different growth trajectory.
With the synergies that emerge from boosting demand while providing a safety
net and policies that are flexible and conducive, India could still keep its tryst
with becoming a USD 5 trillion economy by FY25.